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Giant Russian steelmaker OAO Severstal is a step closer to making a
bid for Stelco.
The Spectator has learned Severstal, controlled by multi-billionaire
steel magnate Alexei Mordashov, has retained renowned merger and
acquisition lawyer Jeff Barnes to represent its interests in Stelco's
bankruptcy protection proceedings.
Industry sources said yesterday the move by Severstal is a major
development. There has been media speculation about the company making a
Stelco bid, but this is the first concrete indication of serious
interest.
Steel analyst Hugh Mackenzie, who previously worked with United
Steelworkers of America, said "they're obviously interested. Why
would they be represented if they are not interested?
"Maybe the lawyer will just sit in the gallery but my sense is it
is more significant than that."
Bruce Leonard, of the Insolvency Institute of Canada, said he feels
Severstal's hiring a lawyer is "a sign of deepening sincerity.''
Severstal representatives could not be reached yesterday. But
spokesperson Lada Astikas said recently, "we have made no official
announcements that could be interpreted as an expression of our interest
in Stelco.
"Our policy is not to discuss unsubstantiated rumours, no matter
what sources they come from."
Severstal has been rumoured to be interested in Stelco for weeks.
Published reports said company executives met with Stelco management and
made their acquisition aims clear. Stelco officials refuse to comment on
any potential bidder.
Barnes -- ranked as one of Canada's top 30 corporate dealmakers --
would not comment. But James Arnett, a fellow lawyer at Fraser Milner and
Casgrain, confirmed Barnes is being retained by the Russian steel company.
Arnett is Premier Dalton McGuinty's special adviser on the Stelco
restructuring. The hiring of Fraser Milner and Casgrain has raised
concern about the role of Arnett.
Hamilton East MPP Andrea Horwath says Arnett should be removed because
it could appear that Arnett's position with the law firm gives Severstal
an unfair bidding advantage.
Arnett, former CEO of Molson, says there is no conflict of interest.
"I'm a counsel to the firm, which is a legal way of saying I'm a
consultant. I'm not a partner, so I don't participate in their
profits."
The province says all its conflict of interest guidelines have been
followed. "Given the circumstances, Mr. Arnett's contract
specifically allows for Fraser Milner Casgrain to act for other parties
interested in the steel industry," Neil Trotter, spokesperson for
the Ministry of Economic Development said in a prepared statement.
Stelco's bankruptcy protection proceedings have entered a phase in
which Deutsche Bank has been given until Nov. 8 to put together a rights
offering for creditors. The German bank is a major Stelco bondholder and
has been given time to conduct due diligence and put together a plan to
raise $200 million to help fund the restructuring. No offers to buy the
company will be dealt with until after Nov. 8.
Severstal is Russia's largest steel company by sales. It is believed
to have plenty of funds and borrowing capacity to finance foreign
acquisitions.
Alexei Yazykov, an equity researcher with brokerage Aton Capital,
expects Severstal to generate pre-tax earnings over $2 billion this year
in addition to $1.3 billion in cash from its own resources and two recent
eurobond issues. But Alexander Pukhayev, senior researcher at United
Financial Group, wondered why Severstal would buy Stelco with its huge debt.
"Severstal does not need to diversify its country risk by picking up
foreign assets with much lower profit margins. From the point of view of
institutional investors, it is somewhat weird."
mmacleod@thespec.com
905-526-3408
mmcneil@thespec.com
905-526-4687
With files from Tom Zaitsev Special to The Hamilton Spectator
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