A Buyout Binge in Steel


By Stanley Reed Just a few years ago, who would have believed that the steel industry would become one of the hottest corners in the mergers and acquisitions game? Well it is. In the latest flurry, ThyssenKrupp on Nov. 28 announced a $4.1 billion offer for Dofasco, Canada's largest steel company. The offer, which was agreed to by the Dofasco board, tops a $3.7 billion hostile bid by Luxembourg-based Arcelor, the world's second-largest steel maker after Mittal Steel (MT).

Why all the action? After decades of lackluster performance by the industry, some talented entrepreneurs and managers -- including Lakshmi Mittal, Arcelor CEO Guy Dollé, and U.S. value investor Wilbur Ross -- have found ways to make money by buying mills and putting them together under one company to lower costs and gain leverage with steel buyers. With demand strong in China and much of the rest of the world, prices doubled last year. They've slipped some this year but remain historically strong.

Dofasco is attractive as a supplier of high-quality steel to the North American auto industry. Both Arcelor and ThyssenKrupp are major suppliers in Europe but have little presence in North America. But ThyssenKrupp is paying a fat price -- a 40% premium over Dofasco's closing price on Nov. 22, the day before the Arcelor bid. Rumors of a bid had already pumped up the shares by then.

LOSING OUT. When Ross sold his International Steel Group, a conglomeration of formerly bankrupt U.S. companies, to Mittal last year for $4 billion, it put pressure on the likes of Arcelor and ThyssenKrupp to try to build a North American presence. None of the steel producers is quite a global company yet, although Mittal is approaching that stature.

Arcelor's Dollé is now mulling whether to come back with a higher offer. He has recently lost out on two other big deals that the industry considered very pricey. In October, Mittal won an auction for Kryvorizhstal in Ukraine, which went for $4.8 billion. Earlier in the month, both companies dropped out of the bidding for Turkey's largest steelmaker, Erdemir, which wound up going to a Turkish military pension fund for $2.8 billion.

In a research note, Michael Shillaker, an analyst at Credit Suisse First Boston, says he thinks ThyssenKrupp will likely land Hamilton (Ontario)-based Dofasco, although it may have to pay a higher price. Dofasco has signed a friendly contract with Germany's ThyssenKrupp and would have to pay a $86 million breakup fee to accept a higher bid from Arcelor.

WILL IT HOLD? The bidding for Dofasco is sparking speculation in the stock of U.S. Steel (X), which jumped from $40.90 on Nov. 25, before ThyssenKrupp's counteroffer, to close around $48 on Nov. 30, a 17% rise. That's still well below its high of $63.90 back in February. Mittal probably couldn't buy U.S. Steel due to antitrust restrictions, but Arcelor has long been a rumored potential suitor, along with South Korea's Posco, which already has a joint venture with U.S. Steel.

Mittal and Ross made their biggest gains buying up companies when few others saw value. But those days are long gone. Every deal now attracts a raft of potential bidders, along with the usual coterie of investment bankers to make sure the seller extracts the maximum price. And just how long steel prices will hold up is another question. They've come down some this year, with the slowing of economies and worry about rapid expansion in China. Although gloomsayers are predicting the end of the bull cycle, the deal frenzy looks like it has a ways to run.

With Michael Arndt in Chicago and Bettina Wassener in Frankfurt

Reed is BusinessWeek's London bureau chief


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