Cleveland-Cliffs Inc. (NYSE:CLF) has announced its agreement to acquire Canadian steelmaker Stelco Holdings Inc. for approximately C$3.85 billion ($2.8 billion). This acquisition marks Cleveland-Cliffs’ first major move after losing its bid for United States Steel Corp. (NYSE:X) last year, and significantly expands its steelmaking footprint.
Acquisition Details
Shareholders of Stelco will receive cash and shares worth about C$70 each, representing an 87% premium from Stelco’s closing price on Friday. This Cleveland-Cliffs Stelco acquisition is part of CEO Lourenco Goncalves’ strategy to transform the company from an iron ore miner into one of the top four U.S. steel producers and the nation’s largest automotive steel supplier.
Goncalves’ Vision and Strategy
Lourenco Goncalves has been pivotal in Cleveland-Cliffs’ aggressive expansion. After a failed attempt to acquire United States Steel, Goncalves has remained vocal about his vision for the company’s growth. He defended the high premium paid for Stelco, stating, “Stelco was completely undervalued in the marketplace. Cleveland-Cliffs is buying a fantastic company at the bottom of the market — because we understand the cyclicality of this business.”
Market Reaction and Impact
Following the announcement, shares of Cleveland-Cliffs rose 0.4%, while Stelco shares surged 74% to $65.05 in Toronto. This Cleveland-Cliffs Stelco acquisition will double the company’s exposure to the flat-rolled steel market and strengthen its market position.
Stelco’s Historical Background
Stelco, originally known as the Steel Company of Canada, has a storied history dating back over 110 years. The company faced significant challenges in the mid-2000s, leading to bankruptcy protection. U.S. Steel acquired Stelco in 2007 and rebranded it as U.S. Steel Canada. However, U.S. Steel abandoned the company in 2015, and Stelco was later revived by CEO Alan Kestenbaum, a turnaround expert who acquired the assets out of bankruptcy in 2017.
Shareholder and Union Support
The Cleveland-Cliffs Stelco acquisition has received support from shareholders representing about 45% of Stelco’s ownership, including major stakeholders and CEO Alan Kestenbaum, who owns about 16% of the company. Additionally, the United Steelworkers union, led by President David McCall, has backed the deal.
Closing Conditions and Future Plans
The transaction is expected to close in the fourth quarter of 2024, pending approval from Stelco shareholders, regulatory approvals, and other customary closing conditions. Goncalves expressed confidence in a smooth regulatory approval process in Canada, pledging to keep Stelco’s headquarters in Canada, maintain Canadian representation on its management team, and invest at least C$60 million in capital over the next three years.
Cleveland-Cliffs’ Acquisition Spree
Under Goncalves’ leadership, Cleveland-Cliffs has been on an acquisition spree, previously acquiring AK Steel Holding for $1.1 billion and the U.S. operations of ArcelorMittal SA for $1.4 billion. Timna Tanners, an analyst with Wolfe Research LLC, noted, “It’s really clear that Cliffs wants to consolidate the steel industry. They posit that fewer players will help pricing power in the market and perhaps reduce volatility.”
Industry and Market Concerns
However, the acquisition has faced scrutiny from some analysts. Gordon Johnson, CEO of GLJ Research LLC, criticized the high premium, especially given the global steel market’s current challenges. “China drives the global steel market, and China’s economy — specifically its real estate and commercial real estate economy — is in a state of disarray. So under that backdrop, with U.S. prices having collapsed and still falling, to go out and buy more capacity and pay such a premium is, in our view, ill-advised.”
Financial and Legal Advisors
Wells Fargo, JPMorgan Chase & Co., and Moelis & Company LLC are acting as financial advisers to Cleveland-Cliffs, while Bank of Montreal is advising Stelco. McCarthy Tétrault LLP and A&O Shearman LLP are serving as legal counsel to Stelco, with Royal Bank of Canada and Stikeman Elliott LLP advising the special committee of Stelco’s board of directors.
Conclusion
The Cleveland-Cliffs Stelco acquisition represents a significant expansion for Cleveland-Cliffs, reinforcing its position in the steel industry. As the company navigates regulatory approvals and market reactions, this strategic move underscores its commitment to growth and industry consolidation.
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