Russian Steelmaker Wins Bidding for Esmark

Russian metals and mining company OAO Severstal announced Wednesday it has an agreement to buy West Virginia-based Esmark Inc. for $19.25 per share. Including the assumption of debt and loans, that puts the value of the deal at $1.25 billion.

Esmark has been at the center of a bidding war between Severstal and India’s Essar Steel Holdings. While management had labeled Essar’s offer superior, the United Steelworkers union was backing a buyout by Severstal.

Esmark issued a statement urging investors to tender their shares to Severstal by midnight July 18. The company’s shares closed at $20.47, up 44 cents or 2.2 percent.

“This is a historic day for Esmark, its dedicated employees, the USW and the Ohio Valley,” said Esmark CEO James Bouchard.

“With Esmark as part of our U.S. portfolio, we’re well positioned to provide domestic supply to a market that has a consistent demand for high-quality steel,” said Severstal CEO Alexei Mordashov, who holds an 82 percent ownership stake in the company.

The union did not immediately comment.

Essar and Severstal each argued it was best-positioned to create value for Esmark shareholders and secure a stable future for the mills. Esmark has operations in 20 states, including subsidiary Wheeling-Pitt plants in West Virginia, Ohio and Pennsylvania and a plant in Greensville County, Va.

Severstal’s offer is worth $775 million, but it has agreed to assume $400 million in debt and cover a $110 million term loan from Essar.

Severstal’s deal includes Wheeling-Pitt’s Allenport plant in Washington County, said Michael Henson, a Severstal spokesman in Washington. “It’s still far too early” to talk about specific plants, he said.

The Allenport cold rolled steel plant has been closed for more than a month. Esmark spokesman Bill Keegan said yesterday there was no indication Severstal planned to reopen the plant. Esmark, in a June 12 filing, said Severstal agreed in March with the company’s plans to close the plant. Esmark said it was closing the plant as part of its cost-cutting moves.

Bouchard publicly thanked Essar for its “good-faith efforts” to acquire the company and for extending the loan at what he called a critical time for Esmark.

Severstal, however, already has a joint partnership with Wheeling- Pitt involving a coke plant in Follansbee called Mountain State Carbon. It also has a daily relationship with the union, which has the contractual right to reject a change of ownership.

The USW invoked its right-to-bid clause and sided with Esmark two years ago in its successful takeover of twice-bankrupt Wheeling- Pittsburgh Corp., defeating a plan to merge with Brazil’s Companhia Siderurgica Nacional SA.

Severstal said its agreement satisfies the successorship clause in the USW contract. It has committed to a five-year capital improvement program that will include optimizing the electric furnace and upgrading the capacity of the hot strip mill.

Severstal said Esmark is a good fit with its operations in Dearborn, Mich., and Columbus, Miss., and with the more recently acquired Sparrows Point mill in Baltimore and the Warren, Ohio- based WCI Steel.

Full ownership of Mountain State Carbon also ensures a long-term supply of coke, a key raw material in steelmaking.

Severstal’s Mordashov, 42, said he would allow his stake in the company to be diluted by more than half, to as little as 40 percent, if stock is issued to fund purchases. Severstal, the largest steelmaker in Russia and the fourth-largest in the United States, plans to expand North American operations and may add new steel products.

“I could definitely use it as an acquisition currency,” Mordashov said, referring to his stake in the company, in an interview in New York. “If we see value-creation in a big deal, we could go for a big deal.”

Severstal is expanding in the United States to take advantage of a weaker dollar that has made steel exports more competitive. Mordashov, who took control of Severstal after being appointed its chief economist in 1988, said he is seeking iron-ore and coal assets in the United States to protect the company from surging prices of its main raw materials.

Mordashov would not identify specific companies and said he has no immediate plans for a large acquisition or reduction of his stake. Nucor Corp., the largest U.S.-based steelmaker, is valued at $24.2 billion, and U.S. Steel Corp. is at $22.3 billion.

Severstal plans to spend $16.3 billion to upgrade and expand steel and mining facilities through 2012, the company said in a prospectus issued for a bond sale. The company also submitted a bid for a U.S. coal-mining complex, according to the document.

Mordashov declined to comment on the bond sale.

“We are great believers in the U.S. economy because you see all the fundamentals allowing the economy of this country to prosper,” he said. “We believe the very simple fundamentals that a big number – - hundreds of millions — live in the U.S. These people will buy cars, and someone will make cars here.”

The Russian steelmaker runs a mill in Dearborn that supplies Ford Motor Co., and the SeverCorr factory in Columbus, Miss. Severstal has invested in flat-rolled steel for the auto and appliance industries in North America and would consider adding products such as bar steel used in construction, Mordashov said.

“In special bar-quality, we are one of the strongest players in the European market and can bring a lot of our knowledge and technology into any market including North America,” Gregory Mason, Severstal’s chief operating officer, said Tuesday in an interview.

Originally published by Staff and wire reports.

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