U.S. Steel rolling on aggressive course
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With a $2 billion acquisition already under his belt this year and the $1.1 billion purchase of Canadian steelmaker Stelco pending, U.S. Steel Chairman and Chief Executive Officer John P. Surma isn't willing to call it quits just yet.
"I don't think we're going to put up a stop sign at this point," Mr. Surma said when analysts asked him if the company would consider more acquisitions.
His posture reflects the company's positive North American outlook, a confidence shared by Russian, German, Indian and other overseas steel producers who either have purchased U.S. mills, are building new ones here, or are in the hunt for the few remaining producers who haven't been consolidated out of existence.
"These companies are all betting long term on a viable U.S. steel industry," said Tony Taccone of First River Consulting in Pittsburgh. "It's a combination of global growth, consolidation and the [weaker] dollar that have given them greater comfort."
Analyst Bob Richard of Longbow Research in Cleveland takes Mr. Surma at his word.
"My gut tells me these guys are definitely not done ... if they see the right asset at the right price," Mr. Richard said.
Strong growth in China, India and other developing countries has increased steel demand overseas and taken some of the pressure off the U.S. market, formerly the most logical place to sell surplus steel produced overseas, Mr. Taccone said. Moreover, the weak U.S. dollar has made U.S. producers more competitive and overseas markets more attractive to export-driven foreign producers.
Ongoing consolidation in the industry also has given producers more price discipline. In the past, steelmakers aggressively cut prices when confronted with slumping demand. Today, with fewer producers controlling more of the market, it is easier for them to curb production in soft markets. The result: U.S. steelmakers haven't been vexed by the erratic price swings that devastated the industry in the past.
"This has been the most muted cycle in the last 10 years," said consultant John Anton of Global Insight.
Mr. Anton's long-term forecast calls for a weak U.S. dollar. Given demand overseas and the benefits of consolidation, he doesn't see sheet steel prices falling much farther than $450 per ton, about $200 a ton higher than they were earlier this decade when many domestic steelmakers scurried into bankruptcy.
"People have to be really convinced in their heart of hearts that we aren't going back to $250 a ton," Mr. Anton said. "Only if you are convinced prices are going to stay high do you invest."
U.S. Steel's acquisition of Hamilton, Ont.-based Stelco follows on the heels of its $2 billion acquisition of Lone Star Technologies, a Dallas producer to steel tubing, in June.
Stelco's production capacity of 5.5 million tons, combined with the U.S. Steel's mills in the United States and Eastern Europe, will boost the Pittsburgh steelmaker's capacity to 33 million tons, making it the world's fifth-largest producer.
Nevertheless, U.S. Steel will pale in comparison with No. 1 Arcelor Mittal, which produced 129 million tons last year.
Mr. Surma told analysts the case for acquiring Stelco, "is very strong." It is expected to produce annual pre-tax synergies of more than $100 million by the end of 2008 and will contribute to U.S. Steel's earnings next year, excluding accounting items related to the acquisition.
"With major facilities located on both sides of the Great Lakes, this acquisition will significantly increase our ability to respond to market demands and our customers' needs," Mr. Surma said.
Stelco's sale comes after an 18-month restructuring that reduced its work force by 29 percent and closed obsolete facilities. The steelmaker employs 3,600 and posted a $126 million operating loss last year on sales of $2.4 billion.
Under terms of the agreement, Stelco shareholders will get approximately $36.60, or $38.50 Canadian, for each of their shares, a 43 percent premium to Friday's closing price. U.S. Steel will use cash and credit facilities to complete the acquisition and retire most of Stelco's $760 million in debt.
Shareholders holding more than 76 percent of Stelco's shares have agreed to vote in favor of the transaction. The deal, which is subject to review by U.S. and Canadian regulators, is expected to be completed in the fourth quarter.
U.S. Steel will contribute about $31 million to Stelco's pension plans at that time and will honor long-term agreements with the Ontario government regarding future pension plan contributions, Mr. Surma said.
U.S. Steel shares fell 38 cents yesterday, finishing at $93.01. They are up 27 percent for the year, but well below their 2007 high of $125.05, achieved June 8.
First Published August 27, 2007 11:41 pm
