Essar reaches agreement with union to buy Algoma

But sources say debt holders have concerns about company’s financial stability

The Indian conglomerate planning to merge Stelco and Algoma into a new Canadian steel company is refusing to surrender its dream despite being defeated in bids for both companies.

Essar Global announced this week it has signed a deal with the United Steelworkers in Sault Ste. Marie to negotiate a framework deal to acquire Algoma through a subsidiary called Ontario Steel Investment Limited.

Gaining support of the union is a requirement for a successful bid for both struggling steelmakers. Essar is the union’s preferred bidder because it has promised to maintain jobs, pay up pension deficits and restore retiree health benefits. A competing bid by a New York-based hedge fund, however, is said to have rejected paying off pension shortfalls in favour of higher returns for debt holders.

It also envisions combining the legacy companies into a new firm.

The offer by KPS Capital Partners has been recommended to Superior Court by Algoma’s creditors, but a hearing to approve that recommendation has been postponed amid rumours KPS has dropped out of the bidding for Algoma and will end its bid for Stelco.

A spokesperson for the hedge fund did not return multiple calls and emails seeking comment.

In a news release Tuesday Ontario Steel said it will assume all employer liabilities under Algoma’s pension and retiree health benefits plans and will continue benefits coverage for active and retired employees. The company will also pay outstanding taxes owed to The Sault and accept environmental liabilities for its land.

In its statement, Ontario Steel said serving the union’s “Holy Trinity” of jobs, pensions and health benefits is the only way to ensure a competitive company.

“We know that any steel business runs on its people; they are the lifeblood of this industry,” the company said. “They need long term, strategic owners, which put workers in a position to do what they do best — manufacture the best steel in the world, right here in Ontario.”

Ontario Steel also criticized the sales processes for both Algoma and Stelco as serving only the interests of debt holders.

“To date, the restructuring processes at both Algoma and U.S. Steel Canada have lacked clarity and transparency and have not served the best interests of the people,” the company said. “They deserve fair and competitive processes and outcomes that serve the best interests of all stakeholders, not a select few.

“We believe there is a better way. That’s why we want to see the USSC and Algoma processes reopened and all alternative bidders be given a fair chance to participate. That will serve the best interests of all involved, particularly the people that depend on this industry the most.”

Ontario Steel is said to be in negotiations with Hamilton and Nanticoke USW locals around a bid for Stelco, despite the rejection of its offer in the sales process.

Sources say the bid for Stelco foundered over pension funding demands by the provincial government. The four main Stelco plans are $830 million underfunded. Such deficits are usually required to be eliminated over five years, but Ontario Steel has asked for 20 years to top up the Algoma funds.

Ontario Steel’s bid for Algoma, described by a source as “a road map for a Stelco offer,” values the company at $903 million US. More than half the bid, 56 per cent, is for pension and health liabilities.

Sources say Algoma debt holders remain concerned about Essar’s financial stability and are said to be attempting to assemble an alternate bid.