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For-sale sign has quietly gone up on the last Canadian-owned steel maker
:: 01 June, 2007
The for-sale sign has quietly gone up on the last Canadian-owned steel maker, with shareholders who own more than half of Stelco Inc.looking to cash out while a takeover frenzy is reshaping the industry, sources say.
A sale of Hamilton-based Stelco would cap an extraordinary sell-off of Canadian steel makers amid a global industry consolidation that is creating titans and has already swept aside neighbouring Dofasco Inc., Algoma Steel Inc.of Sault Ste. Marie, Ont., and Regina-based Ipsco Inc.All the Canadian producers were sold to buyers from Europe or Asia.
Steel, mining, hotels and forest products are among the industries that have been under siege in Canada as cash-rich private equity funds and global giants scoop up smaller regional players.
Toronto's Brookfield Asset Management Inc.
, which runs a restructuring fund that is Stelco's largest shareholder at about 36 per cent, and Appaloosa Management, a U.S. hedge fund that owns 18 per cent, have let it be known that they are ready to sell at a premium to the current market price for Stelco stock, sources said. The shares closed yesterday at $26.90 on the Toronto Stock Exchange, giving the company a market value of almost $750-million.
In response, Stelco has set up a so-called data room to enable potential bidders to have a look at the company's documents, a person close to the company said. Chief executive officer Rodney Mott, who has said Stelco's likely future is to end up part of a global steel giant, is in the midst of cleaning up the firm by cutting jobs and improving financial results.
Like all the other Canadian steel makers that have been swallowed up, Stelco will likely go to a player from abroad that has been drawn by the chance to nab one of the last independent players in North America.
Stelco has high costs related to union contracts and is losing money at its main Hamilton works. But potential bidders include Russian giants Severstal, a bidder for Stelco when it was in bankruptcy protection two years ago, and Evraz, which lost out in the wild bidding war for Ipsco.
Any buyer "is probably going to be an offshore entity, and where Stelco has value above and beyond the operations is as a strategic beachhead," said one steel industry specialist who asked to remain anonymous.
"The operations themselves aren't bad, but Hamilton remains the challenge, and the relations with the union are sort of the wild card."
The jewel in the crown is the company's Lake Erie Works, which is the newest integrated steel mill in North America and thus does not have the legacy costs borne by its sister mill in Hamilton.
The most onerous legacy cost is a 10-year series of payments to the company's four main pension plans that began last year and will cost $675-million.
The payments are designed to eliminate the shortfall in the pension plan and were required by the Ontario government in return for a $150-million loan from the province that is 75 per cent forgivable.
The deal was put in place when Stelco emerged from protection from its creditors. Since then, costs have been cut drastically by Mr. Mott, a veteran of one merger.
He was the CEO of International Steel Group Inc. when it combined with Mittal Steel Co. He chopped the salaried staff at Stelco's Hamilton operations and reduced the unionized work force by more than 1,000 jobs.
Mr. Mott was not available to comment.
Investment bankers said an immediate transaction isn't certain because Stelco's financial and union situations demand much study by potential acquirers.
There are two reasons driving the potential sale.
First, like all the other Canadian steel makers that have been swallowed, Stelco doesn't have the scale to compete globally.
In an industry where the largest player now cranks out more than 100 million tons of steel annually, Stelco is puny, with capacity to make about four million tons.
Second, the ownership structure that resulted from the restructuring is unsustainable, people familiar with the company said.
Brookfield's Tricap Management Ltd. arm, Appaloosa, and Toronto-based hedge fund Sunrise Partners LP financed Stelco's emergence from protection under the Companies' Creditors Arrangement Act in 2006 after more than two years of protracted restructuring.
In return, they got stakes totalling almost three-quarters of the company's stock.
"This is not a stable ownership structure," said one investment banker familiar with the situation.
"This is a steel company owned by a restructuring fund and a couple of hedge funds."
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About Stelco group
Based in Southern Ontario, the Stelco group of companies employs some 4,000 people and delivered $2.6 billion of revenues in 2006, principally from the shipment of 3.7 million tons of high-quality steel into the North American automotive, construction and manufacturing sectors. As a public company restructured and recapitalized in 2006 to profitably leverage its core assets and competitive strengths, Stelco’s main business focus is its Ontario-based integrated steel businesses located in Hamilton and Nanticoke. These operations manufacture value-added steel products, including hot rolled, cold rolled, coated sheet and bar. The company’s shares are traded on the Toronto Stock Exchange under the STE symbol.
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