STEEL
COMPANIES ARE NOW THE DARLINGS OF THE STOCK MARKET
The current bidding by several contending
parties to buy the Canadian steel producer Dofasco has highlighted
the extraordinary turnaround in the value of steel company assets in
the last couple of years.
Aside from privatisations, where special
circumstances apply, it is hard to recall the last time that a steel
company was the subject of a bidding battle between rivals anxious
to grab its business and assets for itself. During the decades when
steelmakers struggled to provide investors with a return on their
capital, such takeover wars were rare.
Most recent steel company fusions – going
back to the mergers that formed Corus, JFE and Arcelor, and the
Mittal acquisition of International Steel Group – have been agreed
deals, not contested takeovers.
Steel company amalgamations like these were
usually based on cost-cutting and finding synergies. Industry
executives were looking for ways to rationalise in order to reduce
inefficiencies. Such mergers often led to plant closures, capacity
reductions and serious job losses.
Now things have changed. Dofasco is part of
other companies’ expansion plans. ThyssenKrupp and Arcelor are
both increasing their production of slabs at low-cost locations in
Brazil, and they need Dofasco as a captive consumer.
Many of Dofasco’s assets are good
quality. It is an important supplier of high-value sheet and
processed products – such as tailor-welded blanks and tubes for
hydro-forming – to the North American automotive industry. This is
a large, if hardly fast-growing, outlet for added-value steels. The
company also has important shares of markets such as packaging
steels which fit with the strategic objectives of both ThyssenKrupp
and Arcelor.
Just as important, Dofasco has iron ore.
Its subsidiary QCM produces more than 13 million tonnes per year of
ore and pellets, and – in an era of high freight costs – it is
well located to supply European steel mills. Dofasco also owns
nearly 30 percent of Wabush Mines, a 5.5 million tonnes per year
iron ore producer. With iron ore prices likely to rise again in
2006, such mining assets are valuable.
At the time of going to press, the outcome
of the Dofasco takeover battle is not decided. ThyssenKrupp’s
agreed offer to buy the company – which topped Arcelor’s earlier
bid - does not close until January 10. That leaves plenty of time
for Arcelor or another party to counter-bid.
Arcelor has an often-stated policy of not
bidding for overvalued assets. But after losing out in the auctions
for Turkey’s Erdemir and Ukraine’s Krivorizhstal earlier this
year, it needs to find other targets. So it may still come back with
a higher offer for Dofasco.
Other bidders may emerge. Nucor is known to
have made informal approaches to Dofasco earlier this year. At least
one major Asian steelmaker is rumoured to be interested.
If Dofasco does end up going to
ThyssenKrupp, will the disappointed suitors look elsewhere in North
America for steelmaking assets to buy? In the immediate aftermath of
the bid for Dofasco, other regional mills began to look like
takeover targets – consequently US Steel’s share price climbed
by almost 40 percent and Nucor’s by 17 percent. Even AK Steel,
which has high legacy costs and made a loss in the third quarter of
this year, saw its shares rise by 24 percent on takeover
speculation.
Steel companies the darlings of the stock
markets – who would have thought it?
