MAN OF STEEL

New CEO seen as Stelco’s saviour

Vancouver Sun - - FP VANCOUVER - KRIS­TINE OWRAM Bloomberg

Win­ter is com­ing and Stelco Hold­ings’ steel plant on the shore of Lake Erie is stock­ing up for the stormy months ahead. Iron ore from Min­nesota and Ap­palachian coal are streaming off ships on con­veyor belts toward the blast fur­nace and coke ovens.

Be­hind the docks, 25-tonne coils of steel are lined up for ship­ment, still ra­di­at­ing heat three days af­ter they were pro­duced.

Af­ter decades of cri­sis, a re­newed sense of pur­pose has set­tled over the 107-year-old com­pany, which just com­pleted the first ini­tial pub­lic of­fer­ing of a North Amer­i­can steel­maker in seven years. The ques­tion hang­ing over the rein­vig­o­rated en­ter­prise is whether Stelco is fi­nally on the cusp of sus­tained prof­itabil­ity, or whether it will wilt in an in­dus­try dom­i­nated by global gi­ants and cheap Asian pro­duc­ers.

In the pan­theon of great Cana­dian cor­po­rate names, Stelco doesn’t ex­actly scream con­fi­dence. The Hamil­ton, Ont.based Steel Com­pany of Canada was once the coun­try’s big­gest pro­ducer, with a work­force of 25,000 in the 1970s. It’s since gone through two stints in cred­i­tor pro­tec­tion while it strug­gled with op­er­at­ing losses, bit­ter labour re­la­tions, high debts and pen­sion deficits. Its most re­cent owner, U.S. Steel Corp., plucked some of Stelco’s best con­tracts and aban­doned what was left of the com­pany in 2015.

Ahead, the win­ter freeze is the least of its wor­ries as pro­tec­tion­ist moves in the U.S. threaten to re­strain its abil­ity to ex­pand in North Amer­ica.

Who in their right mind would want to take con­trol of such a business? Meet Alan Kesten­baum, 55, a Brook­lyn-born turn­around artist who’s now Stelco’s prin­ci­pal owner and chief ex­ec­u­tive.

Where oth­ers see a picked-over car­cass, Kesten­baum sees an ag­ile global player.

Where some see old fa­cil­i­ties and a po­ten­tially frac­tious work­force, Kesten­baum talks up un­used ca­pac­ity, strate­gic lo­ca­tions on the Great Lakes and fix­able labour re­la­tions.

In­vestors seem will­ing to give him the ben­e­fit of the doubt, for now. Stelco’s stock is up al­most 13 per cent since the com­pany’s $17-a-share early-Novem­ber IPO, giv­ing it a mar­ket value of about $1.7 bil­lion.

Bank of Mon­treal an­a­lyst David Gagliano ini­ti­ated cov­er­age with an out­per­form rat­ing and a price tar­get of $23, say­ing, “Stelco rep­re­sents a com­pelling in­vest­ment ve­hi­cle within the North Amer­i­can steel sec­tor.”

Pur­chased through Kesten­baum’s Mi­ami-based pri­vate eq­uity firm Bedrock In­dus­tries Group in June, Stelco has ma­jor ad­van­tages over some of its pre­de­ces­sors and com­peti­tors.

Af­ter $4.4 bil­lion of debt and pen­sion obli­ga­tions were elim­i­nated through a re­struc­tur­ing that ended this year, Stelco has a clean bal­ance sheet, along with $230-mil­lion of fresh cash raised in the IPO.

The com­pany says in its prospec­tus its to­tal costs are “among the low­est in North Amer­ica” and it ex­pects its mar­gins to ex­pand as it uses more of its as­sets and re­gains lost vol­ume.

What’s more, Kesten­baum has a track record of find­ing and turning around strug­gling metal com­pa­nies at Mi­ami-based Globe Spe­cialty Met­als Inc., which he bought for US$1 mil­lion in 2006.

Af­ter 11 ac­qui­si­tions and a merger with Grupo Fer­roAt­lantica, Lon­don-based Fer­roglobe Plc is now worth about US$2.7 bil­lion. Kesten­baum be­lieves he can achieve sim­i­lar re­turns at Stelco.

“Two or three more ac­qui­si­tions down the road and we’ll turn around and we’ll be $6 bil­lion, $7 bil­lion, $8 bil­lion, why not?,” Kesten­baum says in an in­ter­view at Stelco’s Lake Erie Works in Nan­ti­coke, Ont.

The com­pany de­clined to say how much Bedrock in­vested in the Stelco ac­qui­si­tion.

Joe Ra­gan, who worked as Kesten­baum’s chief fi­nan­cial of­fi­cer at Globe Spe­cialty Met­als, says the man has “the magic.”

“He al­ways gets an ex­tra­or­di­nary deal for the as­sets he buys,” Ra­gan, now Fer­roglobe’s CFO, says of his former boss. “He’s got a very sharp acu­ity on how to struc­ture a deal to get a re­ally good value.”

The ori­gins of Kesten­baum’s grand gam­ble on the Great Lakes trace back to an un­savoury dis­pute over 40 cents.

While he was still at Globe Spe­cialty Met­als, that com­pany ac­quired a ferro-sil­i­con fa­cil­ity in Bridge­port, Ala., from a New York­based hedge fund. When Kesten­baum looked into the sit­u­a­tion, he was ap­palled at the way the work­ers had been treated.

“All around this fa­cil­ity I saw prob­a­bly the poor­est neigh­bour­hood I’ve ever seen in my life. These are US$5,000 homes and kids walk­ing around with­out shoes,” he re­calls.

“And I re­mem­ber sit­ting with this hedge fund man­ager at the plant and he was brag­ging to me how he knocked 40 cents an hour off the work­ers, US$3.20 a day, for a sav­ings of US$100,000 a year.”

When the deal closed, the first thing Kesten­baum did was to give the 40 cents an hour back to the work­ers.

That move came to the at­ten­tion of Leo Ger­ard, in­ter­na­tional pres­i­dent of the United Steel­work­ers union, who asked to meet him.

“I thought that was pretty unique,” Ger­ard said by phone from Pitts­burgh.

A few years later, Ger­ard sug­gested Kesten­baum take a look at a Cana­dian steel­maker lan­guish­ing in bank­ruptcy pro­tec­tion. Kesten­baum’s in­ter­est was piqued. “This is part of the pay­back for the lousy US$100,000 I gave to those work­ers in Alabama,” he says.

A pro­duc­tive labour relationship would be a sea change for Stelco. When it was a sub­sidiary of Pitts­burgh-based U.S. Steel, the com­pany locked out work­ers three sep­a­rate times, was sued by the Cana­dian gov­ern­ment for break­ing em­ploy­ment prom­ises af­ter the fi­nan­cial cri­sis and fi­nally shut the Hamil­ton blast fur­nace in 2013.

“Hamil­ton was an Acad­emy Award per­for­mance on both sides of how you do bad labour re­la­tions,” said Peter War­rian, a se­nior fel­low at the Uni­ver­sity of Toronto’s Munk School of Global Af­fairs who is a former USW re­search di­rec­tor. “They both heav­ily in­vested in re­ward­ing the wrong be­hav­iour.”

The Kesten­baum era looks like it’s off to a bet­ter start.

He has al­ready se­cured a fiveyear agree­ment with the re­main­ing 1,650 hourly work­ers, and he’s made sym­bolic changes, such as al­low­ing the union to fly its flag at the plants and invit­ing work­ers to a bell-ring­ing cer­e­mony at the Toronto Stock Ex­change.

Forces be­yond Kesten­baum’s con­trol have also been mov­ing in Stelco’s favour. Steel prices have been ris­ing as China, the world’s big­gest pro­ducer, takes steps to re­duce out­put to cut pol­lu­tion and close il­le­gal and in­ef­fi­cient plants, while prices for key in­puts iron ore and met­al­lur­gi­cal coal have de­clined in the past year.

The near-term pic­ture, though, looks less rosy.

The un­pre­dictabil­ity of the North Amer­i­can Free Trade Agree­ment talks is a risk for Stelco and its abil­ity to win U.S. con­tracts. If Stelco gets through that un­scathed, the Trump ad­min­is­tra­tion may still fol­low through on threats to slap tar­iffs on steel im­ports, or oth­er­wise ramp up Buy Amer­i­can pro­vi­sions lim­it­ing the use of for­eign steel.

The com­pany is hing­ing a good part of its growth on win­ning con­tracts in the auto in­dus­try, which used to be an im­por­tant part of its business be­fore U.S. Steel mi­grated many of those con­tracts to its U.S. plants. This is where a col­lapse of NAFTA, which favours North Amer­i­can au­tomak­ers, could re­ally pose a “unique threat” to Stelco, War­rian said.

U.S. Steel doesn’t com­ment on its com­mer­cial re­la­tion­ships or labour re­la­tions of other com­pa­nies, spokes­woman Meghan Cox said in an email.

Stelco will have to of­fer lower prices to com­pete with its former par­ent com­pany and other ma­jor play­ers, and that won’t be easy with­out scale, said James May, man­ag­ing di­rec­tor of Toron­to­based price fore­caster Steel-In­sight.

“They’re screwed in a down­turn,” when smaller com­pa­nies will have to dis­count their price in or­der to gen­er­ate sales, May said.

Kesten­baum says his new com­pany is ready for the worst. On the threat of re­duced ac­cess to the U.S., he points out he’s also look­ing to boost sales to Mex­ico and Europe, tak­ing ad­van­tage of the com­pany’s lo­ca­tion on the Great Lakes.

And he says he’ll be more care­ful than pre­vi­ous own­ers in pre­serv­ing a clean bal­ance sheet.

“You don’t take on debt that can only be re­paid in op­ti­mal mar­ket con­di­tions,” he says.

Back on the Lake Erie dock, the CEO will soon be­gin ramp­ing up ex­ports from a port that was pri­mar­ily built for im­ports, with a goal of even­tu­ally ex­port­ing 500,000 to one mil­lion tonnes of steel a year to cus­tomers around the world.

“We look at our­selves as a global player,” Kesten­baum says.

COLE BURSTON/BLOOMBERG

Alan Kesten­baum, seen at the Stelco Hold­ings plant in Nan­ti­coke, Ont., has brought a re­newed sense of pur­pose over the 107-year-old com­pany. The new chief ex­ec­u­tive, who has a track record of find­ing and turning around strug­gling metal com­pa­nies, is de­ter­mined to trans­form the com­pany to an ag­ile global player.

COLE BURSTON/BLOOMBERG

The Stelco plant is seen in Nan­ti­coke, Ont. The fu­ture looks more promis­ing for Hamil­ton, Ont.-based Stelco with im­proved labour re­la­tions, a ris­ing stock and a pas­sion­ate CEO to lead the way.

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