Severstal Sells U.S. Steel Plants for $2.3B

NEW YORK (The Deal) -- Russia's Severstal said Monday, July 21, it has agreed to sell its Dearborn and Columbus steel plants for $2.33 billion in cash, exiting the U.S. just over a decade after it bought its way into the country.

Severstal, which is controlled by CEO Alexey Mordashov, will sell the Columbus, Ohio, mill to Pittsboro, Ind.-based Steel Dynamics (STLD) for $1.625 billion and its Dearborn, Mich. mill to AK Steel (AKS), of West Chester, Ohio, for $700 million.

The deals are transformational for all three companies, allowing the Russian group to exit underperforming operations at a time when the U.S. steel market remains oversupplied, while increasing the buyers' output by as much as 50%.

"We have been positioning our balance sheet and organizational structure for growth such as this," Steel Dynamics CEO Mark Millet said in a statement. "This acquisition will result in a prudent capital structure that will allow us to again return to our preferred net debt leverage of less than three times trailing Ebitda within a reasonable timeframe."

Steel Dynamics will increase its annual shipping capacity by about 40% to 11 million tons per annum and gain exposure to the oil and automotive sectors, which it expects will outpace wider steel sector growth. The company said the deal will be immediately earnings accretive and will generate an additional $30 million in pretax "earnings synergies" each year.

For AK Steel, the acquisition of the Dearborn plant secures a mill close to customers and increases its exposure to the U.S. automotive industry.

"In addition to operational and productivity enhancements, the acquisition will create purchasing, transportation and overhead cost savings," AK Steel President and CEO James Wainscott said in a statement. "We expect the transaction to be immediately accretive to our earnings and create significant long-term value."

The acquisition will increase AK Steel's output by about 2.5 million tons a year, or about 50%, to 7.5 million tons a year. The combination with its existing operations will result in cost savings of about $50 million a year, about $25 million of which will be realized within a year of the deal closing.

Severstal said in May that it was considering options for the two plants, amid reports that it had received offers of about $1.5 billion for the two plants from suitors including United States Steel Corp. and Brazil's Cia. Siderurgica Nacional SA.

"The deal could reduce Severstal's net debt to Ebitda to 1.3 times, from 1.7 times," noted analysts at Russia's VTB Capital. "We do not rule out the company paying special dividends, as deleveraging is not a pressing issue."

Severstal entered the U.S. in 2004 with the acquisition of the Dearborn plant as part of a $246 million deal for the bankrupt Rouge Industries Inc. The acquisition spurred a $2 billion investment in the U.S. by Severstal, which spent $1 billion refurbishing the Dearborn plant and a further $1 billion to construct the Columbus mill, and followed that up with further acquisitions.

The Russian company believed the U.S. would offer opportunities for growth and higher margins due to its demand for refined steel products. Those hopes soured in the wake of the 2009 financial crisis, which crimped manufacturing of automobiles and the U.S. construction market, leaving the U.S. with surplus capacity that forced Severstal and several other steel makers to idle mills.

By 2011 Severstal began extracting itself from the market with the sale of three mills to Renco Group Inc. for $1.2 billion in cash and assumed debt. Last week Severstal sold its Friedens, Pa.-based PBS Coals Inc. unit to TSX Venture Exchange-listed Corsa Coal Corp. for an enterprise value of $140 million.

"The sale of Columbus and Dearborn unlocks substantial value to Severstal's shareholders," Mordashov said in a statement.

Steel Dynamics will pay for the plant using cash at hand and a $1 billion bridge loan provided by Goldman Sachs Group Inc. AK Steel said it had secured a loan from Credit Suisse Group.

Evercore Group LLC and Citigroup Inc. acted as financial advisers to Severstal. Skadden, Arps, Slate, Meagher & Flom LLP is Severstal's legal adviser.

Steel Dynamics took financial advice from Goldman Sachs. It tapped Barrett & McNagny LLP for legal advice. AK Steel turned to Credit Suisse for financial advice and Weil, Gotshal & Manges LLP for legal counsel.

The deals are expected to close by the end of 2014.

Shares in Severstal traded Monday on the Moscow exchange at 307 rubles, up R5, or 1.6% on their Friday close. The company has a market capitalization of R257 billion ($7.3 billion).

If you liked this article you might like

Closing Bell: LIVE MARKETS BLOG

Closing Bell: LIVE MARKETS BLOG

Steel Stocks Soar on Reports of Commerce Department Push for Steel Tariffs

Steel Stocks Soar on Reports of Commerce Department Push for Steel Tariffs

What Happens Next to the Stock Market After Tuesday's Horrid Bloodbath?

What Happens Next to the Stock Market After Tuesday's Horrid Bloodbath?

Markets Take the Government Shutdown in Their Stride: Market Recon

Markets Take the Government Shutdown in Their Stride: Market Recon

These Stocks Could Soon Explode Thanks to a U.S. Investment Boom

These Stocks Could Soon Explode Thanks to a U.S. Investment Boom