Past performance makes us wary of the brawlers at troubled steel maker Stelco Inc. It's difficult to think of another company at which labour-management relations have been so dismal for so long.
Naturally, chronically poor relations between managers and employees undermine corporate viability. Currently, Stelco is about as low as it can go, attempting to work its way out of a ridiculously long bankruptcy protection process.
The web here is tangled. Besides wrangling internal parties, retired employees and their pensions must also be taken into account; there is a $1.3-billion pension solvency deficiency. Bondholders are also weighing in with their demands. Shareholders, as is often the case, seem to be getting the shaft.
Those who know our investment history with this corporation might suggest that this criticism is nothing but sour grapes. When we went long on this stock, money was lost. When one of us mistimed a short on it, more cash was flushed down the proverbial toilet. Obviously, our bets on this company were poorly placed. (Now if we could go long on the lawyers helping to guide the current Stelco situation, surely we'd finally rack up a win.)
But what disturbs us most about Stelco is that we, as taxpayers, are being brought into the deal. The Ontario government has agreed to pony up a loan of $100-million that will go toward a $400-million payment to reduce Stelco's $1.3-billion pension solvency deficiency. We believe that, in certain cases, government should participate in turnarounds if it appears realistic there will be a reasonable return.
But given the dismal track record and the manner in which both Stelco management and employees have imploded, we believe the company should sink or swim without our money. If they needed outside funds, they could have accepted one of the previous offers of the contestants who were lined up to buy this entity. All of them were snubbed because Stelco ultimately said it could manage on its own.
Of course, the bailout cost could be worse. It could be $3.7-billion -- taxpayers' money, again -- the sum Export Development Corp. is owed by Atlanta-based Delta Air Lines Inc. and Eagan, Minn.-based Northwest Airlines Corp., which both sought bankruptcy protection last month. The money -- more than 100 bucks from every Canadian, young and old -- was lent to the U.S. companies in recent years so they could buy Bombardier jets.
Compared with that, perhaps the $100-million going to Stelco could be considered a small blessing.
But the key to successful investing is assessing the risk-reward ratio, and we believe it would be best if government did not bail out firms seething with internal animosity.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.