Stelco wants all, or some, of U.S. Steel. But it’s complicated

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Stelco Holdings Inc. is potentially jumping into the bidding war for United States Steel Corp., with analysts predicting the Hamilton-based company has its eye on foundries and mines its former parent may be forced to sell to win regulatory approval for a deal.

In August, one of North America’s largest steelmakers, Cleveland-Cliffs Inc., put U.S. Steel in play by making a hostile, US$7.25-billion offer, made up of cash and stock. Since then, several other companies have joined the hunt, with steel distributor Esmark Inc. submitting a US$7.8-billion all-cash bid.

Several news services have reported that Stelco, backed by an unnamed partner, is considering an offer for U.S. Steel. Stelco spokespersons declined to comment on the company’s intentions.

“Given the list of potential bidders, it does not come as a huge surprise that Stelco may be looking at U.S. Steel,” said analyst Michael Doumet at Scotia Capital in a report. However, analysts who follow steelmakers said Stelco faces significant challenges, as it is far smaller than U.S. Steel and other potential suitors. In addition, the United Steelworkers union has the right to buy U.S. Steel, and it has awarded that right to Cleveland-Cliffs as its preferred partner.

“One possible outcome is that Stelco (and/or its partner) instead acquires certain steelmaking assets from U.S. Steel, if antitrust issues arise from the deal process,” said Mr. Doumet. Stelco would be interested in its rivals’ steel mills and iron ore mines, he said. “Without knowing the outcome of a potential offer or deal, we will highlight that this Stelco management team has an outstanding track record of highly accretive transactions.”

Stelco chief executive officer Alan Kestenbaum took control of the company in 2016 and has turned it around by modernizing its blast furnaces and making acquisitions focused on producing steel for automakers. Previously, U.S. Steel acquired Stelco in 2007, just before the global financial crisis and resulting recession. U.S. Steel put its Canadian operations into creditor protection in 2014.

Stelco still has ties to U.S. Steel, including an option to acquire a 25-per-cent interest in the Pittsburgh-based company’s Minntac iron ore project in Minnesota, the largest U.S. iron ore mine. Analysts say if Cleveland-Cliffs buys U.S. Steel, the combined company would control more than 60 per cent of North America’s automotive steel businesses, and it would be forced to sell plants to satisfy regulatory concerns about competition.

Snapping up U.S. Steel and consolidating the sector “could be brilliant” for Stelco if steel prices remain at current levels or go higher, said analyst Maxim Sytchev at National Bank Financial in a report. “The dynamic would be a mirror opposite if hot rolled steel pricing dips in case of an economic slowdown.”

Stelco currently has approximately US$800-million in cash and could borrow approximately US$1-billion, according to analysts, leaving the company well short of the cash needed to compete in an auction in which bidding started at over US$7-billion. “This implies Stelco would have to work with a partner,” analyst James McGarragle at RBC Capital Markets said in a report. "

Stelco’s largest shareholder is Fairfax Financial Holdings Ltd., with a 24-per-cent stake, and analysts said the Toronto-based insurer could provide financial backing if the steel maker acquires all or part of U.S. Steel.

“Stelco operates with better margins than U.S. Steel, and we therefore see opportunity for potential synergies, in addition to potentially less regulatory risk versus the competing Cleveland-Cliffs proposal,” said Mr. McGarragle. “On the other hand, the competing offer from Cleveland-Cliffs has identified US$500-million in potential synergies; and given Stelco’s smaller scale versus Cleveland-Cliffs, it is uncertain if Stelco would be able to generate a similar level of cost savings.”