American Steel manufacturer Cleveland Cliffs on Monday announced its decision to acquire Canadian steelmaker Stelco Holdings for an enterprise value of approximately $2.5 billion, the company said, in a move that will expand the company’s steelmaking footprint.
The acquisition follows its failed bid to acquire US Steel last year for $7.3 billion. US Steel had called the bid “unreasonable” and decided to merge itself with Japanese steel major Nippon Steel.
Stelco shares surged by 74% at 64.84 CAD at 11:30 am in Toronto.
“The acquisition confirms Cliffs’ commitment and leadership in integrated steel production in North America, and also brings an additional 1,800 United Steelworkers (“USW”) union employees into Cliffs’ workforce,” the company said in a statement.
“The enterprise value of this 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 US mill would provide us,” Lourenco Goncalves, chairman of the board, president and CEO of Cliffs said in a statement.
Terms of the deal
Under the terms of the agreement, 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 per Stelco share.
“One of the important drivers for this transaction was receiving a meaningful portion of the consideration in Cliffs shares,” Alan Kestenbaum, executive chairman of the board and CEO of Stelco, said.
David McCall, international president of the USW union has also supported the deal, CC said.
The transaction implies a total enterprise value of approximately USD $2.5 billion (CAD $3.4 billion) for Stelco and represents an acquisition multiple of 4.8x 3/31/24 LTM Adjusted EBITDA with synergies, CC said.
“Cliffs has a clear line of sight to the achievement of approximately $120 million of estimated annual cost savings with no impact to union jobs,” it added.
The acquisition is expected to be immediately accretive to 2024 and 2025 EPS, the company said.
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.
Strategic benefits of the acquisition
Acquiring Stelco, an integrated steelmaker with two operational sites located in Ontario including a steelmaking facility- Lake Erie Works and a downstream finishing and cokemaking facility- Hamilton Works will expand Cliff’s steelmaking footprint and double its exposure to flat-rolled spot market, the company said.
It is also expected to bring cost advantages in raw materials, energy, healthcare, and currency.
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