By IAN ROSS
The race to consolidate has finally caught up to Algoma Steel.
A month after Algoma ended acquisition talks with Germany’s Salzgitter AG, India-based Essar Global Ltd. tendered a $1.85 billion all-cash bid for the Sault Ste. Marie sheet and plate producer.
The debt-free and cash-rich Northern Ontario company has been an attractive takeover target for two years.
But the Essar proposal took industry watchers by surprise, since their steel holdings subsidiary is not among the world’s top 10 steel makers.
McMaster University Professor Marvin Ryder, a keen industry observer with the DeGroote School of Business, says it’s clear Essar wants Algoma as a beachhead to the North American market.
But their offer “came out of the blue” from a bigger pack of suspected suitors including Rotterdam’s Arcelor Mittal, Germany’s ThyssenKrupp AG, Argentinian multi-national Techint Group and Russia’s Severstal.
Algoma management are recommending approval of the friendly proposal heading into a June shareholders’ meeting where the arrangement must receive two-thirds approval.
The Mumbai-based industrial conglomerate wants to acquire all of Algoma’s common shares at $56 per share.
Ryder says other bidders for Algoma may surface, but Essar’s $56 offer represents the “high end of the range “ for the steel maker.” There’s not much room for someone to come in higher.
“There could conceivably be a buyer who could offer Algoma a bit more synergies and offer more, but above $60, I don’t see how you could argue having a bit more economic value.”
Algoma CEO Denis Turcotte was unavailable for comment, but company spokesperson Brenda Stenta says Essar arrives with strong desire to invest and grow the business.
“There’s a lot of synergies that can be found in the combination of the two companies and we believe it means a secure and successful future for us.”
Essar, which sells steel slabs to Algoma, began a relationship last fall. Talks heated up after Salzgitter negotiations terminated in March.
No specific investment details were announced last month, but plans are to almost double Algoma’s production output in the next three to five years, from 2.4 million tonnes annually to more than 4 million tonnes of steel.
“They have the friendly resources and the technological know how to get us there successfully and get us there quickly,” says Stenta.
The upgrades could potentially mean an investment of more than $500 million over the next three to five years and possibly add upwards of 200 jobs.
Potential areas of expansion are on the steel finishing end with value-added galvanizing technology used in the automotive industry and the manufacturing of wide diametre pipe for the oil and gas sector. “There’s lots of potential, but it’s very preliminary at this stage of where we can go,” says Stenta.
Owned by the billionaire Ruia family, Essar is India’s largest exporter of flat-rolled steel with diversified holdings in oil and gas, power, telecom, shipping and construction.
Just two days after announcing the Algoma deal, Essar inked a pact with Minnesota Steel to build a $1.65 billion US fully-integrated open pit mine. They will build a steelmaking complex on the Mesabi iron range in northern Minnesota.
McMaster’s Ryder says with only two independent Canadian steel companies left (Regina’s Ipsco and Hamilton’s Stelco) he expects more consolidation in the months to come.
Last year, Arcelor purchased Hamilton’s Dofasco for $5.6 billion and the Harris Steel Group was purchased by Nucor Corporation for $1.25 billion.
Provincial NDP Leader Howard Hampton isn’t thrilled that Canadian assets are being taken over by foreigners.
The Kenora-Rainy River MPP wants answers from Premier Dalton McGuinty on why “big name” companies keep getting “gobbled up” by foreign multinationals.
McMaster’s Ryder doesn’t buy the “socialist bent” that vital national assets are being sold off.
After two major financial restructurings in a decade, Ryder says Algoma’s 3,100 employees should welcome the stability and job security of new ownership.
To Sault union leader, Ian Kersley, president of United Steelworkers of America Local 2724, one of two Algoma bargaining units, the deal appears good at face value.
After meeting with Essar representatives April 13, he expressed “cautious optimism” with the group’s vision to fast-track production plans.
Essar officials offered few specifics to him on investment, but plans are to increase plate mill output, expand their slab casting operation, and build new finishing facilities “are very positive to hear.”
“I hope it’ll come to fruition to add construction jobs to the Sault and some permanent jobs down the road.”
After decades of dubious North American ownership, Kersley says any buyer willing to re-capitalize Algoma is welcome news.
“I’ve been with Algoma for 27 years and I’ve experienced ownership with CN (Canadian National), which took money out of us; Dofasco, which didn’t want to improve the assets, and hedge funds (Paulson & Co.) which just took ($200,000 million) out of us.
“The American and Canadian suitors never did us any favours. I’m very open-minded. This company says it’s going to invest in us so God bless’em. The people of the Sault are looking forward to that.”
Sault Mayor John Rowswell was overseas on a trade mission to China, but Sault Ste. Marie Chamber of Commerce president Robert Dumanski says if a new foreign owner wants to make capital improvements and create jobs, “we’re all for it.
“If it’s still good for the community, I don’t care who owns it. If it’s going to be a viable and thriving operation that employs a lot of people, that really doesn’t matter, other than from a nationalistic pride point of view.”
Sault MP Tony Martin is also optimistic with the news, but blames Canadian banks for failing to reinvest in the resource sector.
“Nobody wants to take the long-term view and make that patient capital necessary to turn the resource economy around and give it some (competitive) advantage in the global economy. We shouldn’t be surprised that someone else comes along and sees the value in it.”
Martin says many businesses in his riding have long complained about the unwillingness of banks to provide backing for capital expansion leaving government to fill the void with grants and loan guarantees.
Martin adds Industry Canada will likely approve the Essar acquisition, but the community and unions can still make a strong case for offshore-based companies to live up to their commitments and respect Canadian environmental, health and safety, and labour standards.
