Cliffs Agrees to Acquire Stelco for about $2.5 billion

Continuing its role as an aggregator of North American Integrated capacity, Cleveland-Cliffs shifted its gaze toward Canada and now has a definitive agreement to acquire Stelco Holdings Inc. in a stock-and-cash transaction approximating $2.5 billion. The deal was announced early Monday, July 15 in coordinated company statements.

Stelco shareholders will receive CAD $60.00 per Stelco common share in cash and 0.454 shares of Cliffs common stock per share of Stelco common stock (or CAD $10.00 per share as of July 12, 2024), representing a total consideration of CAD $70.00 (about USD $52 per Stelco share.) The transaction implies a total enterprise value of approximately USD $2.5 billion (CAD $3.4 billion) for Stelco.

Cliffs said in a statement that it has “a clear line of sight to the achievement of approximately $120 million of estimated annual cost savings with no impact to union jobs.” The deal brings an additional 1,800 United Steelworkers (USW) union employees into Cliffs’ workforce. Furthermore, Cliffs stated the acquisition reflects its often-stated commitment and leadership in integrated steel production in North America.

“On behalf of our entire membership, I am excited for this transaction and proud to support a deal that is great for the resilience of manufacturing and Union jobs in North America,” said David McCall, International President of the USW. “Cleveland-Cliffs has a proven track record of making sure the Union always has a seat at the table, and this deal was no different.”

Stelco operates two sites, both located in the province of Ontario: Lake Erie Works, described as the “newest and lowest-cost” integrated steelmaking facility in North America — and Hamilton Works, a downstream finishing and cokemaking facility. Stelco ships approximately 2.6 million net tons of flat-rolled steel annually, primarily hot-rolled coil to service center customers.

Cliffs said the acquisition of Stelco doubles its exposure to the flat-rolled spot market, providing cost advantages in raw materials, energy, healthcare, and currency. “Stelco adds capabilities that complement Cliffs’ existing operations and product portfolio, while diversifying its customer base across the construction and industrial sectors,” Cliffs noted in a statement.

A service center executive told WSD that the deal was “an interesting move. It provides plenty of HRC capacity but not much downstream. Stelco is a somewhat influential supplier to the HRC spot market, and this should give Cliffs a bit more pricing leverage.”

After the deal closes, Stelco is expected to continue operations as a wholly owned subsidiary, preserving the name and legacy of the business.

“I want to first recognize Alan Kestenbaum and the Stelco team for the remarkable turnaround they executed at Stelco, turning what was an underperforming asset under previous ownership into a very cost-efficient and profit-oriented company,” said Lourenco Goncalves, chairman, president and CEO of Cliffs. “In the process, they restored the Canadian national pride associated with Stelco, and we are going to continue that.”

Goncalves explained that the enterprise value of the transaction is “significantly lower than the cost of building an equivalent replacement mill in the United States, and the cost structure is lower than what a new U.S. mill would provide us.” He added: “Stelco is a company that respects the Union, treats their employees well, and leans into their cost advantages. With that, they are a perfect fit for Cleveland-Cliffs and our culture.”

Alan Kestenbaum, executive chairman and CEO of Stelco, stated: “I am proud of what we have accomplished over the past seven years, and the value we have generated. This sale crystallizes a 32% CAGR on a Stelco common share investment since our IPO in 2017. Most importantly, we have revitalized Stelco and restored it to its iconic status in Canada.”

Kestenbaum added: “One of the important drivers for this transaction was receiving a meaningful portion of the consideration in Cliffs shares. I have strong belief and optimism in the North American steel market. I believe that Lourenco and his team have created a winning platform and I intend to remain an investor in Cliffs for a long time to come as he and his team continue to build out their platform and business.”

Cliffs said the acquisition is expected to be immediately accretive to 2024 and 2025 EPS. The transaction implies pro forma net leverage of 2.4x 3/31/2024 LTM Adjusted EBITDA. Upon completion of the transaction, Cliffs shareholders will own approximately 95% and Stelco shareholders will own approximately 5% of the combined company, on a fully diluted basis.

The deal was unanimously approved by Cliffs’ and Stelco’s respective Boards. The Stelco Board formed a special committee of directors which, following review and consideration of the transaction, unanimously recommended the Stelco Board approve the transaction.

The transaction is expected to close in Q4 2024, subject to approval by Stelco shareholders, receipt of regulatory approvals and satisfaction of other customary closing conditions.

WSD Take: Beyond the announcement itself, perhaps the most important tidbit from today’s Cleveland Cliffs announcement was Lourenco Goncalves’ remarked that despite HRC prices at or near $650 per ton, Cliffs has no intention of removing capacity from their North American flat rolled portfolio in the weeks to come. This comes as Nucor announced an additional $20 discount in their weekly spot HRC price to $650 per ton.

Now for the deal…

In acquiring Stelco, Cleveland Cliffs is effectively doubling its exposure to selling spot tons in the United States and Canada. Based on the company’s investor presentation, Cliffs sold 2.6 million tons to spot buyers last year while Stelco sold 2.6 million tons. Cliffs’ management touted this as an opportunity to gain further insight into spot market dynamics and to further diversify its customer base. WSD estimates that about 50% of Stelco’s output is sold in the United States.

Geographically, the deal further cements Cliffs’ footprint in the Great Lakes region. In the coming 18 months, Nucor is expected to complete the construction of its 3.0-million-ton West Virginia flat rolled steelmaking facility. ?Given that Nucor has recently announced that advanced automotive steels will account for less than half of the facility’s output, it is probably safe to assume at least a 67%/33% spot-to-automotive order book from this facility. This begs the question: Does the consolidation of the existing spot market in this region provide Cliffs with increased market power ahead of new oncoming capacity?

WSD will continue to analyze this deal in our upcoming July forecast report, which will be published later this week.

Source:? WSD USA Steel Dynamics Industry News

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