Investment firm Fairfax buys major stake in Stelco

Stelco’s owners, who have been lamenting undervalued share prices, got a giant shot in the arm Monday with investment company Fairfax Holdings Inc. buying a 13.7 per cent stake in the steelmaker.

The move means the investment firm chaired by billionaire Prem Watsa will spend $250 million to buy 12.2 million shares at $20.50 a share.

Stelco Holdings Inc. shares closed at $20.68 on the Toronto Stock Exchange, up 5.13 per cent on the day. That comes after a ten per cent jump in Stelco share value last week after strong third quarter results. The company announced an 84 per cent increase in revenue and 43 per cent jump in shipping volumes compared to the same quarter last year.

The developments are interesting because Stelco CEO Alan Kestenbaum told an earnings conference on Wednesday that he believes “our shares are way undervalued,” and announced a share buyback plan for up to five per cent of the firm’s outstanding stock — 4.4 million common shares.

“Companies do that when they think their shares are not getting enough respect in the marketplace,” said McMaster University business professor Marvin Ryder.

And apparently Watsa would agree the share price should move upward, with its $250 million investment.

“Watsa does not tend to get involved with primary manufacturing but I think he has looked at this and he feels now is a great time to make money in steel. And that Stelco specifically is in a prime position to really cash in,” said Ryder.

But Ryder says it is still unusual by Stelco to be buying back shares with one hand while selling them with the other.

“That’s the surprising thing. If they are going to buy back shares, why are they selling a whack of them? I can’t explain how the Fairfax announcement is consistent with a buyback strategy.”

Fairfax’s stake in Stelco of 13.7 per cent compares with Bedrock Industries’ 46.4 per cent, down from 60.1 per cent. Kestenbaum in a statement said, “We are delighted to welcome Fairfax as a similarly-minded, long-term strategic investor ... which represents a vote of confidence in our future, affirms the substantial work we have done to rebuild this iconic Canadian company over the past 18 months, and validates the tremendous opportunities we see ahead,” said.

Ryder said Stelco is in an enviable position, after coming out of bankruptcy protection in the summer of 2017 with new owner Bedrock Industries that was able to shake off pension, environmental and creditor liabilities.

“When good times come, and you don’t have all of those obligations lying around, you really cash in,” said Ryder.