Turnaround specialist takes 100-year-old Stelco public
Months after emerging from protection
It is not often you see a Canadian- based steel company mulling over an initial public offering, and certainly not one that had emerged out of creditor protection three months ago.
“It is safe to say never,” according to Peter Warrian, senior research fellow at the University of Toronto’s Munk School of Global Affairs and a top academic expert on the Canadian steel industry. “The last time there was a new steel company was about 1956 (the Lake Ontario Steel Company Ltd., or LASCO) and the IPO mechanism as we know it did not exist.”
And yet Hamilton- based Stelco Holdings Inc. filed a preliminary prospectus for a potential IPO Wednesday, the latest twist for steel company that’s more than 100 years old and has entered and emerged from creditor protection twice this century, before officially being taken over by U. S.- based private equity firm Bedrock Industries at the end of June.
“I’m not aware of anyone who’s tried that game recently,” said Marvin Ryder, professor at McMaster University’s DeGroote School of Business, referring to Stelco’s plan to go public just three months after emerging from creditor protection.
The company’s return to the market is being led by Alan Kestenbaum, chairman and chief executive of Bed- rock, who apparently enjoys a Warren Buffet-like reputation in some circles.
“They have quite a history of turning around distressed companies and making them successful,” Ryder said of Bedrock. “You can imagine that if Warren Buffett suddenly took a company and said ‘ I want to make it public,’ there’d be people buying in, not because they cared about what the company made, but because, ‘ hey, that’s Warren Buffett, I want to get on to one of his deals.’”
Bedrock describes itself as a “privately funded company focused on owning and operating metals, mining and natural resources assets and companies.” The company’s website says the management’s preferred deal size is $ 50 million to more than $500 million.
“What they have a habit of doing is buying a distressed company, working to turn it around, and then not immediately flipping it, adding some more pieces to it, and then maybe 10 years, 12 years later, getting out,” said Ryder, noting that Stelco is now a “leaner, meaner company.”
Stelco was seeking to raise about $187 million from the IPO on a potentially $1.25-billion market valuation, according to Reuters, but the prospectus did not disclose the dollar figure or how many common shares would be offered in an IPO, or how big of a stake Bedrock will retain after the sale. The prospectus said that Bedrock “is not selling any Common Shares that it holds in the Offering.”
It’s been a long journey for Stelco, a firm that took its first trip into creditor protection in 2004. The company emerged out of it in 2006 and was bought the following year for US$ 1.1 billion by United States Steel Corp., which renamed it U. S. Steel Canada.
In 2014, U. S. Steel Canada re- entered creditor protection, citing operating losses of about $ 3 billion over five years, as well as more than $1 billion in pension liabilities. After a “competitive sales process,” Bedrock struck a deal with U. S. Steel Canada in December, 2016 to buy the steel company, which would be renamed Stelco.
The deal closed and Stelco exited creditor protection at the end of June this year, after the restructuring process helped it wipe out $ 3 billion in debt and $ 1.4 billion in pension and other postemployment benefit obligations, according to the company prospectus.
The prospectus also noted that Bedrock “indirectly acquired” all of the company’s shares for “cash proceeds of $70 million,” and that Stelco had a total capitalization of $376 million as of June 30.
Stelco’s trips into and out of creditor protection helped it strike a deal with Bedrock and the Ontario government that “we believe has significantly lowered our exposure to unforeseen historic environmental issues” at its two Ontario mills in Nanticoke and Hamilton, according to the prospectus.
Stelco still employs about 2,200 workers who supply the construction, auto and energy industries in Canada and the United States.
Stelco plans to channel the funds raised from any IPO into “selective capital investments” to develop new products and beef up production, such as upgrading the dock at its Lake Erie mill near Nanticoke, and to pay pension and other post- employment benefit costs.
However, the company’s possible IPO comes amid the roller coaster ride of global steel prices, as the renegotiation of the North American Free Trade Agreement drags on, and the Trump administration threatens to impose steel tariffs.
As a key part of its comeback, Stelco seeks to claw back sales in the auto business, one of the sectors most exposed to the international trade talks. The prospectus noted that North American automakers had a record year in 2016 for light vehicle production, but auto made up just three per cent of Stelco’s sales that year, down from 37 per cent in 2006.
Warrian said that U. S. Steel, the former owner of Stelco, “had really taken over all of the contracts for the auto industry,” which is now a “key market” for the reborn Stelco.
“And they’re going to have to fight their way back into the market,” Warrian said.
Ryder said winning auto- related contracts could prove a challenge, and that steel prices have moved “like a heartbeat, up and down.”
Prices for wire and other rolled and drawn steel products fell 5.4 per cent in August, Statistics Canada reported Friday.
A HISTORY OF TURNING AROUND DISTRESSED COMPANIES.