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Algoma Steel has been quietly investigating a possible takeover of
Stelco for about 16 months even though it only announced that interest
last week.
Algoma itself exited bankruptcy protection in 2002, but it has a thick
wad of cash and a CEO determined to build on the revamped company's early
successes. Denis Turcotte dismisses suggestions Algoma is too small to
pull off a Stelco purchase.
In the first wide-ranging interview on his firm's ambitions, Turcotte
said Algoma started looking at various "strategic options" once
it started to get back on its feet. That led to a quiet but detailed
investigation of Stelco that has left his desk in Sault Ste. Marie
covered with file folders full of facts and figures.
"We have studied the company based on the public information for
quite some time and we've developed a variety of permutations and
combinations of merger plans that we think can drive more value with the
two companies together than if they are apart," he said.
"And as we started to see it (Stelco) getting into trouble, we
thought there would be an opportunity to more formally approach this
option later on and sure enough here it comes."
Turcotte said Algoma is interested in all of Stelco, including its
subsidiaries, adding "we are very serious." He said the two
firms have similar products, but each also makes products the other
doesn't.
Algoma has already looked at Stelco's initial confidential information
package, which allowed it to tweak the financial models it had developed
earlier. It must decide by tomorrow whether it will formally declare its
interest in submitting a bid, a decision that would then allow it to have
more detailed access to Stelco's books, as well as site tours and
briefings from management.
If Algoma does take the next step, it will be up against the likes of
Russia's Severstal, U.S. Steel, and Mittal Steel, giant consolidators
that seek to dominate the industry, as well as the Ontario teachers
pension plan and Deutsche Bank. The $900-million Deutsche Bank bid has
been designated as the one to beat by bankruptcy judge James Farley.
But while some analysts have suggested his firm doesn't have the
financial muscle to play in these big leagues, Turcotte begs to differ.
He noted that at the end of the third quarter of 2004, Algoma already had
about $250 million in cash, and it has substantially more now.
"When people see our results at the end of the fourth quarter,
they'll start to appreciate how quickly the cash has accumulated on our
balance sheet," he said. "Other people have tabled the question
about can Algoma pull this off from a financing point of view, and I
believe that is the least of our issues."
He went on to say, "It is really more fundamentally,
strategically does it make sense and how does it position the combined
company on a relative basis to compete with the people that are
consolidating around us."
To those who say the future of the steel industry belongs only to the
consolidators, Turcotte offers another rebuttal. He said even in a world
of producers with 50 and more million tonnes of production, there will
still be room for small, entrepreneurial players. "My analysis of
other industries suggests that they do even a little better financially
through the cycle than the larger players."
If Algoma formally states its interest tomorrow, it will have until
the end of January to submit a bid. It will have to consider several
critical issues in that time, not the least of which is Stelco's
liabilities for future pension and benefits payments. Together, they were
pegged at $1.65 billion last February.
Turcotte called that issue "a critical detractor of value from
the enterprise" and predicted if not dealt with, the problem could
be much worse in 10 years. He wouldn't rule out government help as part
of the solution. The Ontario government assisted Algoma with its pension
liabilities when it restructured in 2002.
Turcotte said when the pension liabilities are combined with Stelco's
$750 million to $850 million debt, the actual value of Stelco as an
enterprise is small.
While not making a commitment, Turcotte said it would difficult to
change pensions of those already retired.
Turcotte said Stelco's internal culture will be another key issue but
said meetings he has had with union leaders so far have been encouraging.
fvallance-jones@thespec.com
905-526-2499.
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