Articles in Category: M&A Activity

Last week, West Virginia-based Esmark Inc. implemented a shareholder’s rights plan, also known as a “poison pill” anti-takeover measure, while the two companies bidding for Esmark continue to battle. As we discussed late last month, the interest from Russian metals-and-mining company OAO Severstal and steelmaker Essar Steel Holdings Ltd. of India springs from  their desire to create a foothold in the U.S. market. Although Essar was unofficially selected for the buyout this week, the choice is not final due to disputes within the companies and Esmark’s steelworkers’ union.

While the future is still uncertain, the poison pill is activated if a company or person attempts to acquire more than 15% of Esmark’s common stock. It doesn’t apply to stockholders who already hold 15% or more or a purchase offer from the United Steelworkers, Esmark’s labor union.

“We believe the adoption of the stockholders-rights agreement will … maximize shareholder value as we move forward with the current process to sell the company,” Esmark’s Chief Executive James P. Bouchard told the Wall Street Journal this Monday. Read more

I am sort of surprised to see that nobody seems to be talking about a pretty major acquisition that took place yesterday. No. 1 metal service center Reliance Steel & Aluminum Co., announced they intend to acquire No. 10 service center PNA Group from Platinum Equity, a private equity firm. In a deal valued at $1.1b, it is significant to metals buyers throughout the US. Given the rapid ascent of steel prices (PNA’s primary products), the timing of this sale worked in Platinum Equity’s favor.

So what is driving the deal? The first is market entree to Mexico, where PNA has joint ventures established. That is a pretty smart move given some of the re-sourcing activities going on between China and Mexico .  It’s hard to believe that the market leader, Reliance did not have a Mexican operation already but there you have it. The second reason behind the deal is the quest to continue Reliance’s spectacular stock market climb. Since the beginning of this year, Reliance stock prices have increased by 56% according to this   recent research report.  The acquisition of PNA is immediately “accretive” to earnings. This means it will likely lead to increased earnings per share immediately.

According to that same research report, published just one day prior to the acquisition, the news is not all positive. Sellers are starting to short the stock, anticipating a fall and investors are not convinced of the stock’s strength. From an operational perspective, “April carbon steel inventories, as reported by Metal Service Center Institute, were higher as flat rolled shipments by the service centers fell, offsetting increases in plate, beams, bars, and pipe and tube,” according to Purchasing.com. Furthermore, July steel hikes are much less than April, May’s or June’s so maybe there is reason for investors to start becoming a bit pessimistic about steel producers and service centers.

As Reliance digests their most recent acquisition perhaps the rest of us might catch our breath.

–Lisa Reisman

Two Steel Mergers Worth Watching

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M&A Activity

It’s nice to be noticed for doing a great job. It’s quite another to take the heat from a CFO demanding cost reduction for steel and related metals products. Purchasing managers and their staffs have been riding a commodity volatility wave for a few years now. But some executives are just noticing the impact that these nasty little things like steel price hikes are having on the bottom line. So when normally I might be inclined to yawn through a merger and acquisition article that I stumble upon, now, I read with eyes wide open for any glimpse of what lies in store.

It was with great interest that I saw Severstal (Russia’s biggest steel maker) has now made a bid for troubled Esmark, matching competitor Essar’s (of India) bid with one interesting addition; namely, a more favorable agreement for the United Steel Worker’s union. Smart move for a company that seeks to build its US presence. But it’s a greater move for US steel buyers. With price increases coming fast and furious, placing domestic steel capacity in foreign hands may actually be very good for the US. We believe foreign owners, in an attempt to grow market share here in the US may carry a sharper pencil  as opposed to idling operations to keep prices high. Read more

Imagine this headline: “Rio Tinto Just Found a Whole Load of Copper”. Or this one: “BHP to Swallow Rio Tinto”. Both are real, and both came from Forbes. What’s interesting is the timing of one in conjunction with the second. As has been widely reported, BHP made a hostile takeover bid for Rio Tinto back in early February. But Rio is trying to maintain its independence. Last Friday’s discovery of about 628 million tons of additional copper helped that initiative. The new copper was found below the current Kennecott Utah Copper Bingham Canyon pit, according to the article. Interesting timing is all I can say about this find.

As someone who prefers free markets, competition is a very good thing. So who am I to question this sudden discovery? As an aside, a combined BHP Billiton/Rio Tinto would be the third largest company in the world. Now that is some industry power the metals markets don’t need right now!

–Lisa Reisman

Editor’s Note: This is the second of a two part series. The first part appears here

So what can we expect in the years ahead, not so much from ArcelorMittal, Lakshmi Mittal himself is a young man and will no doubt continue on this path as long as the competition authorities will allow him. No I was thinking more of the steel industry in general. Last year’s US Steel acquisition of Stelco is an example of a trend that has been running for several years now as the industry has fought for the critical mass to stay in the big league by buying up the opposition. US Steel’s purchase makes pretty good strategic sense even if some thought the price a bit steep at the time. But it still leaves USS with only a third of the sales of ArcelorMittal and doesn’t rank them in the top 30 worldwide. The same process is happening in China which currently has some 260 iron and steel companies but is undergoing consolidation. Diana Chen, one of China’s richest women and known as the iron princess for her success in the steel industry is quoted as saying in five years China will be dominated by just a few mega steel producers.

It is these huge steel producers in the developing world that many of today’s western steel producers fear, and against the threat of which they are currently trying to position themselves through acquisition.

Should consumers be concerned by this? There was considerable anxiety when the Japanese and later the Korean steel industry grew at breakneck speed in the 70’s and 80’s but today they are generally seen as reliable and responsible suppliers of high quality material. The arrival of the Japanese can also be said to have created competition that lead to dramatically improved steel qualities and production methods worldwide, something all consumers should be grateful for. There is always the risk as a fragmented supply base becomes consolidated that control moves from the buyer to the seller as supply options are reduced. But as much as high prices the cyclical nature of the steel market has been a major headache for consumers and producers alike. Consolidation should in theory allow the producers to adjust production to meet demand more efficiently and effectively. To a certain extent we are seeing that in the market place today, demand has dropped off in certain product areas but mills have adjusted production and prices have remained firm. The telling time will be in the coming 12-18 months if demand drops off as predicted by some observers (us included) will the mills respond with a gentle easing in price and reduced supply? Let’s see. One thing is for sure though, the insatiable appetite to buy steel mills will continue.

–Stuart Burns

Big Steel – Getting Bigger

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Ferrous Metals, M&A Activity

Editor’s Note: This is the first of a two-part series

I was reading an interesting article the other day in that most informative of publications, the Economist, about the rise Lakshmi Mittal. Mittal has become the world’s fifth richest man worth some $37b principally through his 43% stake in the world’s largest steel maker ArcelorMittal. Mittal didn’t exactly start from scratch in building his global empire, daddy got him kick started with a new steel mill in Indonesia in 1975 but even so his rise has been spectacular. It’s more akin to a Silicon Valley business than a mature industry like steel making. Mittal really hit the big time in October 2004 when he purchased the consolidated steel assets of Wilbur L Ross’ International Steel Group for $4.5b and in the process became the largest steel maker in the world. A position enhanced further by the merger with Luxembourg based Arcelor in 2006 (can it only be 2006, it seems longer ago, so commonplace has the merged company’s name become in just 2 years). Typically such a rate of acquisition would be funded by massive debt but with AM’s that has not been the case. You may say $22b is a mountain of debt in anyone’s language but when taken in the context of $105b of sales and $19b of EBITDA profit it’s not excessive. So how has he done it?

Timing is in part the answer. When Wilbur Ross purchased the rusting assets of LTV, Bethlehem Steel and Weirton starting in 2002 it was after the US steel industry had gone through 35 bankruptcies in five years. He paid $2b for those assets, worked his magic reducing costs with the unions and offloading pension liabilities and two years later sold International Steel Group to Mittal doubling his money in the process. Since then the steel industry has been driven by unprecedented demand from China and all steel assets (and profits and cash flow) have been headed north. Even the UK’s sick man Corus has managed to make money during this time.

May be Mittal’s biggest achievement is getting all these disparate once individual and autonomous plants working as a single entity. Not just in the US but in Eastern Europe and later with Arcelor. In his own words part of that was down to the nature of the businesses he bought along the way, both ISG and Arcelor were themselves the product of earlier consolidations in the industry and by the time Mittal came along the plant managers and corporate bosses were used to change. Apparently it didn’t scare them like it so often does with well established mature industries. Even so the rapid re-branding and integration of these different companies deserves study as an example in successful change management as much as it does in entrepreneurial money making.

–Stuart Burns

Sorry for the rhyming. I’m in one of those moods…

Buried in the bowels of it’s Sunday edition, the Wall Street Journal had an article on how Rio Tinto Alcan became the subject of an anti-trust investigation filed by the European Commission. According to the article, the EC “charges Alcan with having abused its dominant position by ‘tying its dominant aluminum smelting technology with handling equipment sold by Alcan’s subsidiary ECL.’ ” It’s a major accusation as the punishment for Alcan, if found guilty, could be 10% of company revenues. The EC believes Rio Tinto Alcan has acted uncompetitively because the concern is that as the biggest aluminum producer in the world, Alcan and as owner of ECL, a major producer of equipment used in the aluminum industry, innovation would be stifled. Specifically, the EC has accused Rio Tinto Alcan of monopolistic behavior.

Bloomberg had a more in depth analysis pointing to the contracts Alcan has with several customers to share aluminum smelting technology. In the contracts, Alcan prevents companies from purchasing pot tending assemblies from other manufacturers besides ECL, its wholly owned subsidiary.

A couple of weeks ago we wrote about the correlation between high commodity (in this case metals) prices and the number of M&A transactions within the sector. Let’s hope the trust busters will be watching these transactions closely becauses the risk is only going to increase as metals industries continue to consolidate.

–Lisa Reisman

Note: This is part two of a two-part series discussing a recent report from Ernst & Young. Part one offers  additional insight and an introduction to the topic.

Inaccurate Analytics

The Ernst & Young report expresses disdain at the accuracy of metals price predictions, noting the disappointing errors of the past few years. The writers suggest that some metals, like nickel and copper, are hard to predict, but add, This has been, not coincidentally, a time of sustained market strength and rising metal prices over the last three years. Analysts, almost universally, have been predicting a sharp decline in metals prices to return to the average levels of the previous 10 years ¦ It is only when the mining companies are really convinced that future revenue from operations justifies the commitment of significant capital outlay that they will accept the risk, resulting in further capacity ¦ Investing just before prices plummet is a far harder mistake to survive than going along with cautious market sentiment and not making an investment.

The problem with any forecast is that it relies on forecasting tools — typically statistical models that rely on past data. These models may be better than a guess in the air, but they inherently fail to act in a predictive fashion because the utilized information has been gleaned in hindsight. In addition, it is always challenging to incorporate correct estimates of multiple factors, such as supply and demand, supply risk events which affect supply and demand patterns, technological innovation, etc. Read more

BHP Billiton, the world’s leading diversified mining company, tried to win over smaller rival Rio Tinto through a hostile bid last week to create the world’s third-largest corporation,  behind Exxon Mobil and General Electric. The proposed corporation would become  what Purchasing.com calls “a mining giant worth approximately $400 billion and possibly  … the world’s largest iron-ore supplier” — or, at the very least, a formidable opponent for Vale of Brazil, the current top supplier of iron-ore. A merger could also create the world’s largest producer of copper and aluminum. Despite a 3.4-to-1 takeover offer, however, Rio Tinto seems to have little interest in the deal at its current value. Rio Tinto chairman Paul Skinner wrote a letter to shareholders on Monday explaining the board’s view, noting that the current  unsolicited bid of $147.4 billion  undervalues the company and its stronghold. He stressed that no action is needed on behalf of the shareholders. A copy of the letter can be found online through various news outlets, but here are some quick excerpts:

— “BHP Billiton’s offers, while improved, still fail to recognize the underlying value of Rio Tinto’s assets and prospects.”
— “Our plans are unchanged and will remain so unless a proposal is made that fully reflects the value of Rio Tinto.”
— “BHP Billiton’s announcement is not a firm offer for your shares or ADRs (American Depository Receipts). There is currently no formal offer to consider. You do not need to take any action.”

BHP already increased their  bid to give Rio shareholders 44 percent  of the combined entity rather than the 36 percent  they offered in November. If  a mere half  of Rio shareholders endorse the bid, a hostile takeover could occur. Don Argus, BHP Billiton chairman, released his own letter this week, sending a forceful message to  his company’s shareholders. In the letter, he  told  BHP shareholders, “The offer we have made [to Rio Tinto] is both compelling and responsible and, very importantly, is value enhancing for you.”

The inner workings of the possible deal and legal arrangements between these dual-listed companies tend to be complicated, as the International Herald Tribune disclosed this week. The above-linked article describes a diverse assortment of separate legal arrangements in Australia, Great Britain, and the U.S., all of which will be necessary for these international companies to come to a complete agreement.

Earlier this month, China’s steel sector responded to fears of such an agreement. State-owned Aluminum Corp. of China (Chinalco) decided to purchase a hefty 12 percent of Rio Tinto’s London shares, accounting to nine percent of the entire company, with help from Alcoa Inc. Approximately $14 million was spent on this foothold, which Chinalco hopes will not only prevent the birth of an imposing super giant  — this will be no fledgling infant, as a combined BHP/Rio company could control more than a quarter of the world’s iron-ore  — and diversify Chinalco’s focus.

Similarly, the International Iron and Steel Institute  recently announced that a merger between Rio Tinto and BHP Billiton should not be allowed. The merger, they say, is not in the public interest and would likely create a monopoly.

London-based Rio Tinto will release its full-year earnings this morning at 6 a.m. local time. Bloomberg predicts that second-quarter earnings have amplified, estimating, “[Rio Tinto Group] may report second-half profit rose 9.4 percent because of record iron-ore production and its $38.1 billion acquisition of Alcan Inc.” The figures released today could have a dramatic  effect on the future of the company and its role with BHP Billiton.

Readers, what do you think? How will this play out? How should each company respond to the situation? As always, we would love to hear your thoughts in our comments section.

–Amy Edwards

Update: Rio Tinto Group earnings for 2007 are now available online. –AE

Before MetalMiner begins our short holiday hiatus, we would like to introduce contributing writer and associate editor Amy Edwards, who plans to write the occasional blurb and even in-depth features articles for MetalMiner. A graduate student at Northwestern University in Evanston, Ill., Amy looks forward to learning more about the metals industry and sharing that knowledge with MetalMiner readers. Feel free to contact Amy at aedwards (@) aptiumglobal (dot) com to suggest a future article topic.

Gold continues to make the news, as Lisa Reisman discussed this week in her post on selling gold jewelry to play the “price arbitrage” game. But many investors, as well as members of UK-registered JPMorgan Global Natural Resources Fund, are looking outside of the jewelry box and recommending that financiers pursue more minor metals, those lesser-known metals that still find their profits soaring. According to a recent Reuters article, Investors would do well to bet on firms with exposure to minor metals such as chrome and molybdenum as they are relatively cheap and demand is robust, a senior fund manager said on Wednesday. The article touts ferromanganese as one of the most potentially profitable metals, which is worthy of note after the recent announcement that ArcelorMittal plans to purchase OFZ, one of the leading ferro-alloys manufacturers in Central Europe. In addition to ferromanganese, chrome and molybdenum are also considered interesting in the Reuters article, according to Ian Henderson, manager of JPMorgan Global Natural Resources Fund. Many such commodities have not witnessed such a large run-up in prices, he adds, mentioning cobalt, tantalum and vanadium as other commodities that should develop a larger following.

These thoughts aren’t completely new, as Jack Lifton wrote last month in Resource Investor that minor metals are constantly developing as investment opportunities. His article offers a broad look at minor metals, and we would suggest a glance at the article for anyone hoping to study the opportunities some more. Minor metals, we’re beginning to see, may not belong in the minor league.”

–Amy Edwards

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