$1.25 billion steel deal

Severstal to buy former Point suitor Esmark

June 26, 2008|By Andrea K. Walker | Andrea K. Walker,Sun reporter

Russian steelmaker OAO Severstal emerged yesterday as the apparent winner in a takeover fight for West Virginia-based Esmark Inc., agreeing to buy the steelmaker for $775 million plus debt in a deal that could boost production at Sparrows Point.

The deal comes just seven weeks after Severstal completed its purchase of the Baltimore County steel mill from ArcelorMittal for $810 million, with promises to invest $500 million to boost output to full capacity. Yesterday a Severstal spokesman said that with the acquisition, Sparrows Point would supply semi-finished steel slabs to Esmark's struggling Wheeling-Pittsburgh steel plant.

The companies entered a merger agreement and Esmark said it would recommend the transaction to its shareholders. The tender offer is set to expire July 18, and a Severstal spokesman said the company expected to complete the acquisition by late summer, subject to customary approvals.

Wheeling-Pitt has a finishing mill that turns slab into coils for customers and distributors. The merger could also lead to the production of steel products that generate higher profits.

Sparrows Point would also benefit from access to Esmark's network of Midwest distribution centers, which serve buyers of steel that make the metal into everything from appliances to tin cans.

Sparrows Point would also complement Esmark's Ohio Coatings, which like the Baltimore plant produces tin.

"Generally speaking, there is substantial synergy potential between these two facilities," said Severstal spokesman Michael Henson.

"Those synergies when realized will be a benefit to both," he said.

Severstal is buying Esmark for $19.25 a share, topping the latest $19-a-share bid from Essar Steel Holdings Inc., based in India. With debt, the deal is valued at $1.25 billion, Esmark said.

Severstal had the support of the United Steelworkers of America, which had opposed a sale to Essar.

Craig Bouchard, Esmark president, said the sweetened offer by Severstal won the Russian company the deal. "We are a public company so our directors have one, and only one, fiduciary duty," Bouchard said. "That is to achieve the best price for our shareholders."

Bouchard had said in the past that Esmark didn't necessarily need the union support on a contract. But yesterday, Bouchard said that if the bids had been equal, they would have chosen the company with the union backing.

"It wasn't like we favored one company vs. the other," Bouchard said. "When Severstal came to $19.25 and Essar didn't raise their price, it was over."

David McCall, negotiating chairman for the United Steelworkers, and John Cirri, president of Local 9477, which represents Sparrows Point workers, did not return calls yesterday.

Bouchard and his brother, James P. Bouchard, Esmark's chairman and chief executive officer, will both retire under the deal.

An earlier effort by Esmark to buy Sparrows Point collapsed when its financing fell through, prompting a U.S. trustee to seek a new buyer. ArcelorMittal was under a Justice Department order to sell the plant to settle anti-trust issues.

At the time, Esmark said it would sell Sparrows Point-produced slab to Wheeling-Pitt at below-market prices. Wheeling-Pitt has been losing money for several quarters.

Henson said it was too early to know whether Severstal would sell Sparrows Point slab to Wheeling-Pitt at a lower price.

Severstal, created in the aftermath of the collapse of the Soviet Union, has been expanding in the United States. With U.S. operations based in Michigan, it bought the former Rouge Steel in Dearborn and SeverCorr in Columbia, Miss. In May, it agreed to buy Warren, Ohio-based WCI Steel Inc. for $140 million in cash.

Just this week, Severstal officials, in a visit to Sparrows Point, said they planned to begin a $10 million upgrade of the plant's blast furnace this summer.

andrea.walker@baltsun.com

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