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

Two perennial problem children of Canada's steel industry would be merged into one steel maker if the New York private equity firm that has been nominated as the buyer for Essar Steel Algoma Inc. has its way.

"I can confirm that it is our intention to acquire each of Algoma and Stelco [U.S. Steel Canada] and merge them," Mike Psaros, co-founder and co-managing partner of KPS Capital Partners LP, said Wednesday.

An offer by KPS and the term lenders of Essar Algoma has been chosen as the successful bid by Essar Algoma's board. It is conditional on KPS signing a new labour contract with the unions that represent employees in Sault Ste. Marie, Ont., as well as an agreement with the Ontario government.

The comments by Mr. Psaros are the first public confirmation that the private equity and turnaround firm is bidding for U.S. Steel Canada. The proposed plan to combine the two companies is a deal that would create a steel maker capable of producing about five million tons of steel a year.

"There are offensive mergers and defensive mergers," Mr. Psaros said in a telephone interview. "In defensive mergers, you put two companies together and you shut stuff down. This is an offensive merger."

All steel mills now operating at the two companies will continue to run and nothing will be shut down, he said.

Essar Algoma operates a mill in Sault Ste. Marie, while the remaining steel-making mill at U.S. Steel Canada is in Nanticoke, Ont.

In a bizarre twist in the saga, Essar Algoma's parent group Essar Global is bidding for U.S. Steel Canada, but its earlier bid to buy back its Canadian unit was disqualified by the Ontario Superior Court.

Mr. Psaros would not discuss what KPS is prepared to pay for the two companies, but "we have constructed a business plan that we're prepared to invest hundreds and hundreds and hundreds of millions of dollars of risk capital into."

Sources familiar with the KPS bid for Essar Algoma said it is in the range of $750-million.

The two steel makers, each burdened with debt of more than $2-billion, are operating under the protection of the Companies' Creditors Arrangement Act. It's the third trip through the CCAA process for Essar Algoma and its predecessor companies and the second time for the former Stelco Inc., which United States Steel Corp. purchased in 2007.

The United Steelworkers union has already signalled that negotiations to reach a deal in Sault Ste. Marie will be difficult.

"We have successfully restructured a number of times and each and every time the restructuring was successful, the company became successful, the company was subsequently sold and became debt laden and a victim of the market," the negotiating committee of USW local 2251 in Sault Ste. Marie said in a message to its members.

"A long-term solution is only available if the restructured owner intends to run the company with a view of keeping it."

Mr. Psaros said KPS has turned around such manufacturing companies as Winnipeg-based bus maker New Flyer Industries Inc. and has held on to other companies it owned for eight years.

Reaching a deal with the province could also be difficult. KPS will not assume the liabilities of Essar Algoma's defined-benefit pension plan, which amount to more than $500-million. That potentially leaves the Ontario government's Pension Benefit Guarantee Fund on the hook. Mr. Psaros would not discuss plans for U.S. Steel Canada, where the pension liability exceeds $800-million.

At Essar Algoma, he said, KPS will make a fixed annual payment and an annual profit-based payment into trust funds set up to finance the pensions and post-retirement benefits Essar Algoma provides employees.