Swedish steel maker SSAB has agreed to buy Finland’s Rautaruukki Corp. for $1.6-billion (U.S.) as a prolonged downturn in demand forces Europe’s smaller players to cut costs and deal with idle capacity.
After racking up combined losses of more than €400-million ($542-million) over the past five quarters, the Nordic rivals sealed a combination that had been discussed on and off for decades and was given urgency as steel demand declined.
SSAB was among the world’s top 40 steel producers in 2010 but rival mergers, soaring Chinese demand and a sluggish European market pushed it out of that group in 2012.
“These kinds of periods of crisis have the advantage that what was impossible becomes possible,” said SSAB chairman Sverker Martin-Lof, who also chairs the company’s biggest investor, holding company Industrivarden.
Rautaruukki chairman Kim Gran said he initiated negotiations soon after being appointed to the company’s board in 2012. “I’m sure the idea has been alive for very long ... But I guess it was me that first took the contact to Sweden, and that’s where it started off,” Gran, also the chief executive of winter tire maker Nokian Renkaat, told Reuters.
Shares in both companies soared after they announced the all-share deal, representing a 20-per-cent premium to Rautaruukki’s closing price of €6.89 on Tuesday and valuing the firm at 10.1 billion Swedish crowns ($1.6-billion).
They plan to cut their combined work force of more than 17,000 by about 5 per cent, mostly in Sweden and Finland, helping lower costs by up to 1.4 billion crowns, and to focus the new business on specialty steel products – where profits are less volatile than in commodity carbon steel.
The companies’ executives said the geographic and cultural proximity of the two Nordic companies would help smooth the merger of the former rivals.
“It’s a great and overdue step of consolidation in the Nordic steel industry. And if there are any price increases they will come from the better leverage these companies will have on their customers,” said stainless and special steel consultant Markus Moll at SMR.
Others also said the company may be able to cut more than 1.4 billion crowns.
“The synergies they mention are quite conservative because they don’t take into account the capital expenditure saving potential and the sale of non-core assets,” said Kepler Cheuvreux analyst Joakim Ahlberg.
Steel consumption in the European Union fell by about 4 per cent last year and was around 30 per cent below a 2007 peak. World consumption, by contrast, rose by about 3 per cent in 2013 and was 20 per cent higher than in 2007.
European demand for construction steel has fallen especially hard, notably in southern Europe. The world’s largest steel maker, ArcelorMittal, with about 45 per cent of its sales in Europe, has responded by idling blast furnaces and permanently shutting some facilities, such as those in Liege, Belgium.
The Rautaruukki deal offers a way forward for SSAB’s main owner Industrivarden, which has seen the value of its investment halve over the past three years while the broader Swedish share index rose by 20 per cent.
The deal, including debt, would value Rautaruukki at 0.8 times expected 2013 sales. That compares with a multiple of 0.5 for ArcelorMittal, according to Thomson Reuters data.
The companies said they expected the exchange of Rautaruukki shares for new SSAB stock to begin in late April or early May. The new company would have its primary listing in Stockholm but will apply for a secondary listing in Helsinki.
Rautaruukki shares soared 34 per cent to €9.215 by 1616 GMT on Wednesday, while SSAB A-shares rose 13 per cent to 54.90 crowns on optimism that the tie-up will allow the companies to cope with volatile prices and further depressed demand.
The rise in SSAB shares meant the value of the bid increased to $1.8-billion. The combined market capitalization of the two companies rose by $780-million to $4.4-billion.
The sector has been struggling since 2008, although ArcelorMittal has become slightly more upbeat and prices have risen a little in recent months.
Rautaruukki, established in 1960, and SSAB, created in a three-way merger in 1978, have vied for decades in specialty steel products, also competing with the likes of Salzgitter, Germany’s second-biggest steel maker.
The new company will have facilities in Sweden, Finland and the United States with combined annual capacity of 8.8 million tonnes. That is still small compared to ArcelorMittal, which can produce 119 million tonnes.
The top investors in SSAB and Rautaruukki hailed the deal, in which SSAB would exchange 0.4752 class A share and 1.2131 class B shares for each Rautaruukki share. Some of SSAB’s main banks have committed to financing the new company, they said.
Finnish state investment fund Solidium, Rautaruukki’s main shareholder with a 39.7-per-cent stake, will be the biggest investor in the new company by number of shares, while Industrivarden will lead in terms of votes.
SSAB’s Martin-Lof also hinted at more deals ahead, saying the merged company would be in a stronger position for further consolidation. “If we want to do something more later in Europe, it is better we are together... We have to be active and keep an eye what’s going to happen,” he told Reuters.
SSAB CEO Martin Lindqvist said he did not foresee major antitrust issues. But some analysts warned of possible complications, citing stainless steel maker Outokumpu’s 2012 acquisition of ThyssenKrupp’s Inoxum unit. Much of that deal was reversed after authorities demanded the sale of a large mill as a condition for its approval.
Antti Viljakainen, analyst at Inderes Equity Research, said the combined market share of SSAB and Rautaruukki in the Nordic region may be very close to the Commission’s preferred limits.
“If the authorities were to step in, I guess SSAB would cancel the whole deal instead of agreeing to sell some key assets,” Viljakainen said.
Finnish union leaders said the deal could help lessen uncertainty at Rautaruukki, while calling on the government to protect jobs.
Opposition politicians, however, criticized the government, led by the conservative National Coalition party, for allowing another Finnish firm to be sold off – a sensitive subject following the sale of Nokia’s handset business to Microsoft.
“Once again a remarkable piece of Finnish industry is given into the hands of foreigners,” said Reijo Tossavainen, a member of opposition party The Finns.