Bloomberg News

Icahn Bids for Commercial Metals in Deal Worth $1.73 Billion

November 30, 2011

(Updates with strategist’s comment in ninth paragraph.)

Nov. 28 (Bloomberg) -- Billionaire investor Carl Icahn offered to buy Commercial Metals Co. and combine it with his existing metals operations in a bid that values the steel-scrap recycler and distributor at about $1.73 billion.

Icahn Enterprises LP, which owns a 10 percent stake in CMC, is offering $15 apiece for the other shares without any financing or due diligence conditions, he said today in a letter to CMC directors. The offer is 31 percent more than the stock’s Nov. 25 closing price. CMC jumped 24 percent to $14.17 in New York.

CMC collects scrap that it melts to make products such as steel rebar used in construction. Icahn said he will sell “non- core” assets and appoint a new management team.

“A below average operating performance fueled by a distracting and misguided international growth plan, combined with a disastrous investment record, has become the defining characteristic of Commercial Metals,” Icahn said in the letter.

CMC will review the letter and respond in the best interests of the company and stockholders, the Irving, Texas- based company said in a separate statement. CMC said it has improved financial results, cut costs and exited non-core businesses. The company plans to close or sell a mill in Croatia, shut rebar-fabrication plants and reduce its global workforce.

Aggressive Approach

Icahn is taking a more aggressive approach with CMC than is typical for him, said Louis Meyer, a New York-based analyst at Oscar Gruss & Son Inc., who recommends buying the shares.

“He is coming in there to replace management and run the company better,” Meyer said in a telephone interview. “Given the size of his assets, it’s not an idle threat.”

CMC probably will reject the takeover offer and may then announce a strategic review, Meyer said. The company is too small to be operationally scattered across the globe, except perhaps in Australia, which is a key steel hub for the China market, he said.

“Icahn may initiate a hostile $15 tender if management rejects his proposal, as we expect it will,” Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM Partners LLC, said in a note.

If CMC’s board seeks other offers, Nucor Corp., Schnitzer Steel Industries Inc., Gerdau SA, Steel Dynamics Inc., and Sims Metal Management Ltd. are among companies that may be interested, Moore said.

‘Misguided’ Plan

CMC has dropped 60 percent in the past five years while the the Standard and Poor’s 400 Materials Index has increased 19 percent. Icahn Enterprises rose 0.5 percent to $36.31 in New York.

Icahn said he is prepared to negotiate terms of a tender offer immediately. His company plans to nominate three board members at CMC’s next annual shareholders meeting, challenging the directorship of Chief Executive Officer Joe Alvarado. CMC needs to refocus on core operations in North America, Icahn said.

“We are extremely concerned about the capabilities and behavior of the current board and management,” Icahn said in the letter. “We do not believe the current board is capable or willing to undertake the actions necessary to enable Commercial Metals to compete in the future.”

Investors can cash out their shares and buy stock in CMC’s competitors, which “are much better managed and better situated to take advantage of any possible economic recovery,” Icahn said in the letter.

Activist Investing

About 86 million metric tons of scrap will be used to make steel in the U.S. this year, and another 24 million tons may be exported for steelmaking elsewhere, according to Bloomberg Industries. Scrap, mostly used in electric-arc furnaces, accounted for 60 percent of raw-steel production last year, according to the Institute of Scrap Recycling Industries.

Icahn’s activist investing has lifted the chairman of Icahn Enterprises to No. 61 on Forbes magazine’s list of the world’s billionaires this year, with an estimated net worth of $13 billion as of September. Icahn, 75, who often buys distressed companies, started his metals business through the acquisition of Philip Services Corp., a bankrupt Canadian scrap metals and industrial services company, in 2004.

Icahn Capital LP, the financier’s hedge fund, disclosed in July that it paid almost $101 million to acquire a 10 percent stake comprised of shares and options in Commercial Metals.

In March, Icahn announced he would return all the money managed for outside investors through his hedge fund. Icahn has been using the funds to take stakes in companies such as Yahoo! Inc. and Lions Gate Entertainment Corp. and then push for changes that he said would boost their share prices.

The value of the CMC deal is calculated based on the 115.5 million shares that are outstanding according to Bloomberg data.

--With assistance from Miles Weiss in Washington. Editors: Simon Casey, Tina Davis

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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