KPS Capital Partners LP has abandoned its bids for Essar Steel Algoma Inc. and U.S. Steel Canada Inc., ending its effort to combine two Canadian steel mills that have been operating in creditor protection.Kenneth Armstrong/The Globe and Mail
KPS Capital Partners LP has abandoned its bids for Essar Steel Algoma Inc. and U.S. Steel Canada Inc., ending its effort to combine two Canadian steel mills that have been operating in creditor protection.
The New York-based private equity fund withdrew the bids because it was unable to reach agreements with the Ontario government, a source familiar with the matter said Thursday.
The Ontario government was involved because of combined pension liabilities that exceeded $1-billion at the two steel makers, as well as unknown environmental costs.
KPS had teamed up with Essar Algoma's term lending syndicate to make an offer that was anointed by Essar Algoma as the preferred bid. Its withdrawal from the U.S. Steel Canada sales process leaves Bedrock Industries Group LLC, another private equity fund, as the only bidder remaining in that auction.
When they revealed their plan to merge the two companies, KPS officials described it as an "offensive merger" that would create one healthy steel maker.
Members of the Essar Algoma term lending syndicate will proceed with a bid on their own, sources said.
The participation by KPS in the Essar Algoma bidding also ran into strong opposition from several stakeholder groups, notably the United Steelworkers union, which represents workers at the mill and head office in Sault Ste. Marie, Ont. The bid by KPS and the term lenders was conditional on Ontario government approval and the negotiation of a new collective agreement with the union.
The proposed collective agreement "represented the elimination of at least 50 years of bargaining," Mike Da Prat, president of USW Local 2251, which represents workers in the mill, said in a court filing. "It also represents a precursor to a huge amount of chaos that would hit the workplace."
The union has filed a motion with the Ontario Superior Court seeking the approval of Essar Global, Essar Algoma's former parent company, as a qualified bidder under Essar Algoma's sales and investment solicitation process.
Essar Global, which placed the Canadian unit into protection under the Companies' Creditors Arrangement Act (CCAA) last fall, has been disqualified by the court, which cited concerns about Essar Global's financing.
The union said Essar Global's $903-million (U.S.) bid would repay debtor-in-possession financing, asset-backed loans made to Essar Algoma and municipal taxes due to Sault Ste. Marie.
The new bid, made by an Essar Global company called Ontario Steel Investments Ltd., would also finance the $243-million deficit in Essar Algoma's pension plan.
"The union executive has requested and received substantial information that on its face, confirms and verifies that Ontario Steel, through its shareholders, have more than the required cash available to close this transaction and that the equity of these shareholders is significant and substantial so as to have the ability to raise whatever further financing is required to continue the operation of Algoma Steel," the union said in a court filing.
Essar Global also bid for U.S. Steel Canada, but the company has also been eliminated from that sale.
The USW, which also represents workers at U.S. Steel Canada mills in Hamilton and Nanticoke, Ont., called Thursday for a public inquiry by the Ontario government into the sale of that steel maker, which went into CCAA protection in September, 2014.
Gary Howe, president of USW Local 1005 in Hamilton, said the union has been excluded from some critical discussions during the sales process.