UPDATE 4-Russia's Severstal sells U.S. steel plants to AK steel, Steel Dynamics

Mon Jul 21, 2014 1:15pm EDT

* Sells Severstal Columbus to Steel Dynamics

* AK Steel Corp is buying Severstal Dearborn

* Analysts anticipate dividends; deal to reduce debt (Adds details on buyers, share movement)

By Silvia Antonioli and Maria Kiselyova

LONDON/MOSCOW, July 21 (Reuters) - Russia's Severstal said it would sell two U.S. steel plants for $2.3 billion, withdrawing from the U.S. market at a time of rising tension between Russia and the West and turning its focus to its domestic business.

Severstal will sell its Columbus unit in Mississippi and Dearborn unit in Michigan to Steel Dynamics and AK Steel Corp respectively, a sale that may allow the Russian company pay an extra dividend and reduce debt.

Shares in Steel Dynamics, which outbid United States Steel Corp for the plant with a $1.63 billion offer, rose 8 percent to a three-and-a-half year high.

AK Steel's stock initially rose 4 percent to a two-year high, but later gave up all gains to trade down 4 percent, suggesting investors were unhappy with the $700 million paid for a plant that has weighed on Severstal's North American results.

Severstal, Russia's second-biggest steel producer, had said in May that it was considering strategic options for these plants, which produce steel products mainly for the autos sector.

The sales comes as tensions between Russia and the West grow over Moscow's involvement in the Ukraine crisis, which has already resulted in a series of sanctions against Russian companies and individuals and may lead to further sanctions.

Severstal, controlled by Russian billionaire Alexei Mordashov, said politics did not influence its decision to sell its U.S. businesses but some analysts think the situation may have weighed on the final decision and the timing of the sale.

"The political sentiment could have pushed them to do it because it is safer for them to stay away from the U.S. market," said a London-based analyst, who declined to be named due to the sensitivity of the subject.

Severstal earlier divested plants in Maryland, Ohio and West Virginia and said last week it would sell Pennsylvania-based metallurgical coal producer PBS Coals to Canada's Corsa Coal for an enterprise value of $140 million.

Severstal North America made up about 30 percent of the group's revenue.

TOWARD HIGHER MARGINS

The Russian steelmaker embarked on a series of international acquisitions in the early 2000s, near the peak of the cycle for steel and commodities. In the last couple of years, however, its focus has switched from international growth to its higher-margin domestic Russian steel market.

Large steelmakers, including ArcelorMittal, Tata Steel and ThyssenKrupp, have been cutting production, jobs and idling or selling plants in the last few years in response to oversupply and weak steel prices ST-CRU-IDX.

"The Russian domestic business is more profitable than other parts of the business and that's why other parts, such as the U.S. branch, have lost some of their appeal," said Credit Suisse analyst Semyon Mironov.

Some analysts, however, say selling assets in the United States, a market that they see recovering in the next few years, is a questionable strategy. Confidence in the sector, a major industrial indicator, has improved slightly over the past few months, even while overcapacity persists.

"The sale has been talked about for quite a while, but these assets are in pretty good shape ... there was no rush for a sale," said VTB Capital analyst Vadim Astapovich.

The Columbus factory, expected to boost Steel Dynamics' production capacity by 40 percent, is a good buy, said analysts, as it gives the company a stronger grip on the high-margin autos and construction markets in southern United States and Mexico.

The Dearborn plant would expand AK Steel's exposure to the autos market and help it cut costs, but analysts cautioned that the plant has been a drag on Severstal's North American results.

DEBT CUT OR SPECIAL DIVIDEND

Although Severstal was already pretty financially solid, having reduced its debt from a peak of $8.3 billion in 2008 to $4.8 billion in 2013, according to Thomson Reuters data, the cash it will obtain from the sale will allow it to reduce debt further or to pay a special dividend.

"The deal could reduce Severstal's net debt to EBITDA to 1.3 times... However we do not rule out the company paying special dividends, as deleveraging is not a pressing issue at this point," VTB Capital said in a note.

The closing of the deal is not subject to any financing conditions and is expected by the end of 2014, Severstal said.

Moscow-traded shares in Severstal rose 2 percent during normal trading hours, outperforming a broader market index which was down 1.34 percent. (Additional reporting by Supriya Kurane, Sneha Banerjee and Anannya Pramanick in Bangalore; Editing by Mark Potter, Jason Neely and Savio D'Souza)