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A crucible once used to carry molten steel is seen outside the Essar Steel Algoma plant on Nov. 13, 2015 in Sault Ste. Marie, Ont.Kenneth Armstrong/The Globe and Mail

Essar Steel Algoma Inc. has accepted a joint bid by New York private equity firm KPS Capital Partners LP and the term lenders of the company as the best offer in the steel maker's sales process.

The deal requires agreements on a new labour contract between the proposed buyers and Essar Algoma's unions in Sault Ste. Marie, Ont., and the approval of the Ontario government. It could also face opposition from other groups of Essar Algoma lenders.

If the bid by the lenders and KPS is successful, it sets up the potential of a single entity taking over Essar Algoma and U.S. Steel Canada Inc., because KPS is one of three bidders remaining in the running to buy the former unit of United States Steel Corp. Sources said KPS, another equity fund called Bedrock Industries and in a bizarre twist, Essar Steel Algoma's parent, the Essar Group, are the three bidders still in the hunt for U.S. Steel Canada.

Essar Algoma has been operating under the protection of the Companies' Creditors Arrangement Act since last November. U.S. Steel Canada has been in the same position since September, 2014.

"The new company formed by the consortium will securely position New Algoma with a capital structure to sustain all phases of the steel cycle," Kalyan Ghosh, chief executive officer of Essar Algoma, said in a statement.

The agreement comes two weeks after Essar Algoma said it was pursuing not only the sale of the company, but also a standalone restructuring or new debtor-in-possession (DIP) financing to replace the loans that have enabled it to keep operating since November.

The price of steel has risen more than 50 per cent in the past three months, increasing the prospects that buyers for one or both of the companies will want the mills to keep producing steel, rather than liquidating the assets.

The combined KPS-lender bid for Essar Algoma "contemplates a combination of cash and credit bid for the operating assets," John Strek, senior managing director of CDG Group LLC, the chief restructuring adviser to the steelmaker, said in a court filing.

The deal calls for a purchase price that combines enough cash to pay off the outstanding liabilities under the DIP loan and secured debt that remains on the books as of the closing date of the deal.

Essar Algoma has drawn down $175-million from the DIP loan. Its debt includes a term loan of $371-million (U.S.) that holds second priority on the steelmaker's working capital assets and first priority on the company's fixed assets. That first priority is shared with $375-million of senior secured notes.

Whether stakeholders will agree that combining the two steelmakers makes the most sense or even that KPS is the best owner for Essar Algoma remains under discussion.

Mr. Strek's filing said that to be successful, Essar Algoma needs changes to agreements with the union, pension relief and less stringent environmental regulation as well as new financing.

A clause in the Essar Algoma agreement is likely to anger the United Steelworkers locals that represent employees at the mill and head office in Sault Ste. Marie.

That clause is that KPS and the lenders will not assume "legacy obligations" referring to Essar Algoma's pension deficits of more than $500-million.

"We are on record as stating that we will not meet with anybody unless they give us the assurance that we can talk to our members about what we talk about [with the potential buyers]," said Mike Da Prat, president of USW Local 2251, which represents workers in the mill in Sault Ste. Marie.

"If the non-disclosure agreement is in full force and effect, then we're not prepared to discuss collective agreement issues until we get assurance in writing that we can talk to our members," Mr. Da Prat said.

He said existing confidentiality agreements prevent him from identifying potential bidders.