By IAN ROSS
It’s not a matter of if Algoma Steel will be acquired, but when.
After surviving two bankruptcies within a decade, the former whipping boy of the Canadian steel industry is now considered one of most attractive takeover targets in a worldwide consolidation frenzy.
The debt-free and cash-rich Sault Ste. Marie company has been a hot topic for more than a year among industry analysts as a prime takeover target by a slew of potential suitors that include United States Steel Corp., Luxembourg’s Arcelor Mittal, Germany’s ThyssenKrupp AG, Argentinian multi-national Techint Group, Russian steel maker Severstal and Brazil’s CVRD, the new owner of Inco.
Foreign steel producers are looking for ways to enter the North American steel market to avoid trade duties on steel imported from offshore.
In a conference call to analysts in January, Algoma President and CEO Denis Turcotte refrained from commenting on any speculation about potential suitors.
Turcotte said there are no plans to sell the business which is focused on reinvesting in leading edge production technology and global alliances.
However, the 105-year-old company is entertaining offers.
After private talks with Germany’s second largest steel maker, Salzgitter AG fell apart in mid-March, Algoma officials acknowledged the company was in preliminary talks with about a half dozen other suitors.
Algoma spokesperson Brenda Stenta has down played acquisition talks.
“Despite this approach, there’s no assurance that any agreement will result from it or any transaction will be completed. At this point in time, it’s business as usual.”
The company rolled to a strong finish in 2006 posting fourth quarter net results of $50.4 million on the way to wrapping up a strong 2006 financial performance.
The company’s year-end earnings of $221.8-million was the third most profitable year in the company’s history.
Most of the company’s 2.42 million tonnes of steel shipped last year was hot rolled sheet used by auto makers including Ford Motor Company and General Motors Corp.
In their fourth quarter statement, the company remains “cautiously optimistic” going into 2007 which will be partially impacted by North American economic conditions in the auto, heavy machinery, housing and non-residential construction sectors, as well as imported steel.
Peter Warrian, a leading steel industry analysts at the University of Toronto’s Munk Centre for International Studies, says what makes Algoma an attractive target is that it’s a low cost producer, has plenty of cash with a high rate of profit, earning about $100 per tonne, while its Canadian rival Stelco is losing $40 per tonne.
Algoma is one of the world’s most efficient steel producers thanks to a modern $440-million rolling mill, a cost-cutting strategy and a surge in steel prices in recent years.
“However they need new markets and products for the future,” says Warrian
Just about every independent Canadian steel producer is in play for acquisition, says Warrian, including Stelco and Ipsco. “They will all be consolidated into multi-national steel producers over time,” similar to last year’s mining mega-merger. “The ultimate driver is technology flows which are driven by international alliances.”
But there are also “soft” factors involved as well, Warrian says. “Locational advantages are crucial,” as well as value-added activity, the quality of local institutions like civic leadership, education, infrastructure and health care to attract and retain skilled trades and management expertise.
Algoma’s geographic distance from major markets has been considered a drawback in the past, but Warrian says the transportation cost disadvantage is small. “Their productivity advantage is much greater than that.”
The company put itself on the selling block twice in 2005 and 2006, before abandoning the idea. The company also briefly considered buying troubled Hamilton steel producer Stelco in 2004.
Other recent acquisitions of Canadian steel mills include Arcelor’s $5.6 billion purchase of Hamilton’s Dofasco last year and the Harris Steel Group by Nucor Corporation for $1.25 billion.
