U.S. Steel Lake Erie Works
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Rebirth of troubled Stelco will test investors’ mettle:
By filing a preliminary prospectus, Stelco’s new owners are gambling that investors will find renewed belief in the steelmaker.
The plan for the renamed Stelco is to recapture market share lost under U.S. Steel. - Adrian Wyld,THE CANADIAN PRESS FILE PHOTO
If not unprecedented, it's certainly a rare move for a government to applaud the filing of a preliminary prospectus, the Wynne team now cheerleading Goldman Sachs and BMO Nesbitt Burns as those two underwriters sell the street on the merits of Stelco Inc.
With Finance Minister Charles Sousa and Economic Development Minister Brad Duguid championing last week's filing — made, of course, in anticipation of an initial public offering of shares — the subtext is an expectation that such investors as the province's big pension plans (OMERS, Teachers) and other monied players will step up and take a significant position in the long troubled steelmaker.
Well, who wouldn't want to see the legendary steel company embraced by institutional investors?
Is it too sour to caution that not every preliminary prospectus leads to a successful initial public offering? Remember Porter Aviation Holdings Inc.? The energetically brash airline packed in its hopes of listing shares a brief six weeks after its first filing back in the spring of 2010, citing "unfavourable market conditions caused by volatility in the equity markets."
And there's precedent too in troubled storied companies right-sizing themselves under the Companies' Creditors Arrangement Act before successfully going public and then — boom. The tale of the T. Eaton Co. comes to mind, closing stores and restructuring debt before a successful share listing based on a business strategy to "significantly increase its market share and profitability." Investors bought that boilerplate pitch. Eighteen months later Eaton's collapsed into the arms of Sears Canada Inc.
The Stelco narrative is as storied as Eaton's, with more than a century of steelmaking and far more than its share of political drama, including a tortuously long, 26-month restructuring followed by a disastrous U.S. takeover that came packaged with production and employment commitments made by acquiring company U.S. Steel, followed by a federal lawsuit under the Investment Canada Act for non-compliance with said deal. (U.S. Steel cited the unforeseen consequences of the 2008 financial crisis.) The out-of-court settlement in that case in December 2011 was scandalously never made public. A bankruptcy filing followed three years later.
It's a new Stelco that underwriters are pushing, albeit one that hopes to recapture the glory days of the old Stelco, driving high-strength and ultra-high-strength steel into the American Midwest and Southern Ontario.
Investors will have to divine the long-term intentions of the team behind the rebirth. Bedrock Industries, which acquired all of the outstanding shares of U.S. Steel Canada in a deal that closed in June, is a still-new outfit, majority owned by Alan Kestenbaum and the private equity firm Lindsay Goldberg, the latter being a specialist in leveraged buyouts. Kestenbaum was the founder of Globe Specialty Metals Inc., a silicon producer, which merged with a Spanish company in 2015 creating Ferroglobe Plc. Kestenbaum resigned from Ferroglobe at the end of last year with a reported $30 million (U.S.) exit package.
The plan for the renamed Stelco is to recapture market share lost under U.S. Steel: across a 10-year period Stelco's focus on automotive collapsed to 3 per cent market share from 37 per cent. "These regions represent the heart of North American automotive manufacturing where numerous automotive original equipment manufacture and Tier 1 component manufacturers are located," the prospectus states.
The new owners are gambling that investors will find renewed belief in Stelco as a nimble, low-cost, technologically advanced producer. Part of the proceeds of the share offering would be invested in restarting the temper mill in Hamilton and installing new furnaces, an affirmation of what the beleaguered steelworkers have been saying all along: that the galvanized steel production in Hamilton is second to none. (Steelmaking was shut down in Hamilton in 2013 and the operational focus placed on finishing lines.)
That's just one piece of a business plan that will be predictably susceptible to commodity price fluctuations, to Chinese steel exports, to the manufacturing cycle, to product demand, to — who knows — some whims from the U.S. administration.
In a statement from the ministry of finance last week there was the not-so-subtle hint that the government expects Bedrock to commit to the long haul. "The stated intentions of the owners to maintain their involvement and commit to new capital investments in the company's operations is particularly welcome," the release states.
We've seen this kind of language before. For the sake of the more than 2,000 direct jobs at Stelco, and the economic benefits that accrue to the region as a result of those jobs, we have to hope that this time the government has it right.
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