A federal bankruptcy judge sealed Geneva Steel's fate Wednesday, approving a $40 million sale of its core assets to a Chinese company.
The sale to Qingdao Iron & Steel Group Co. is the beginning of the end of one of Utah's largest bankruptcy cases and prepares the way for Geneva's equipment to be dismantled and shipped to the Chinese coastal province of Shandong.
"It's bittersweet," Geneva chief executive Ken Johnsen said after the bankruptcy hearing. "I think we got a very reasonable if not high price for the equipment that we sold in light of the marketing that we did. But on the other hand, it's very difficult to see the equipment be sold, because it means that Geneva Steel will not reopen."
Qingdao had previously offered $35.3 million in cash. However, a bidding war between Qingdao and another Chinese firm, Nanjing Iron and Steel Co., pushed the final purchase price to $40 million.
Even though Nanjing's bid of $41.5 million was higher, it was rejected by Geneva and ultimately the court due to the absence of a letter of credit guaranteeing payment. Qingdao's offer was backed by a letter of credit through the Bank of China and also is expected to be confirmed through CitiCorp USA, one of Geneva's secured creditors. Closing is expected to occur in seven days.Wednesday's sale to Qingdao includes the plant's core production line:
- The steelmaking facility known as Q-BOP.
- A slab caster that turns liquid steel into a slab.
- A rolling mill that rolls the steel into plate or sheet.
- A plate finishing line.
"It will be a new day dawning for the Geneva equipment in Qingdao," said Bernhard Schiefer, a representative of Qingdao. "I think there will be a great future for that equipment. It's a huge city. It's a huge market."
Qingdao city, with a population of roughly 7 million people, is China's largest production base for home appliances and electronics. Schiefer said there is a fast-growing demand for plate and sheet metal products in the area. Geneva's equipment will be a key part of an expansion project aimed to increase Qingdao's steelmaking capacity.
China is expected to consume 300 million tons of steel this year, Schiefer said, producing three times the amount of steel as the United States.
Qingdao's purchase price is the same amount Joseph Cannon and a group of investors paid to buy the Geneva plant from U.S. Steel in 1987. Since 1989, the company has spent more than $645 million for the plant and equipment to modernize and maintain its production facilities, according to filings by Geneva with the U.S. Securities and Exchange Commission.
Despite the hundreds of millions of dollars in upgrades, Geneva fell on hard times by the mid-1990s after a flood of foreign steel imports made it nearly impossible to compete, according to Geneva officials. The company incurred financial losses every year since 1995.
By 1999 the Vineyard-based plant was forced to file bankruptcy, which it successfully emerged from in January 2001, thanks largely to a $110 million term loan that was 85 percent guaranteed by the federal government.
But the loan was not enough. A year later the company filed a second time for Chapter 11 bankruptcy protection, defaulting on its loan. In March 2002, the government paid CitiCorp $92.1 million 85 percent of the $108.3 million remaining balance on Geneva's loan.
The $40 million sale covers a little more than one-third of what Geneva still owes the federal government and CitiCorp. The company anticipates it will generate millions more dollars through the sale of emissions credits, water rights and property it still holds.
According to George He, a representative of Qingdao, the dismantling, transport and reassembly of the equipment could take 18 months to 24 months to complete at a cost greater than the $40 million Qingdao is paying for the equipment.
However, he said buying used steelmaking equipment is cost-effective, and it is faster to install than new equipment.
In addition to approving Qingdao's purchase, Judge Glen E. Clark approved the sale of Geneva's reversing mill equipment to LongCheng Metallurgical Equipments and Material Group Co. for $1.42 million. A second motion for the sale of Geneva's temper mill for $650,000 to TDI Group also was approved by the court.
In December, Geneva sold its pipe mill equipment for $1.45 million to a company based in India.
Geneva was built by the U.S. government due to fear of a World War II Pacific Coast invasion or closure of the Panama Canal. Construction on the plant lasted from 1941 to 1944. The federal government sold the plant after the war to U.S. Steel.
At the height of its operations, during the early 1960s, the company employed nearly 8,000 workers, according to James Wood, interim director of the Bureau of Economic and Business Research at the University of Utah.
Under Cannon's tenure, the mill employed 2,850 people.Geneva was at one time one of the state's biggest employers, according to a study cited by Cannon, accounting for 1 percent of the total personal income of Utah, the highest of any nongovernmental entity, including Kennecott.