U.S. Steel to acquire Stelco for $1.1 billion

NEW YORK/TORONTO (Reuters) - U.S. Steel Corp agreed to acquire Stelco Inc for $1.1 billion, bagging the last big Canadian-owned steelmaker and strengthening its position in flat-rolled steel products in North America.

Chief Executive Officer John Surma said the deal, announced late on Sunday, will make U.S. Steel the world's fifth-largest steelmaker.

He added that the deal, expected to close in the fourth quarter, would not preclude U.S. Steel from making further acquisitions. In June, the company completed the $2.1 billion acquisition of tubular steelmaker Lone Star Technologies.

"I don't think we're going to put up the stop sign -- this is a very dynamic industry," he told Wall Street analysts on a conference call on Monday.

Stelco emerged from bankruptcy protection last year and put itself up for sale in June after a wave of foreign takeovers in the industry.

Pittsburgh-based U.S. Steel, which itself was a subject of takeover talk this year before giant German industrial conglomerate ThyssenKrupp denied an approach, said it would buy Stelco for C$38.50 per share, a 43 percent premium over the company's closing stock price of C$26.93 on Friday.

U.S. Steel would also pay down the majority of Hamilton, Ontario-based Stelco's debt, which was about $760 million as of June 30, according to a joint statement late on Sunday night.

The companies said shareholders owning more than 76 percent of Stelco's shares have agreed to support the deal.

During the conference call, Surma said that in addition to the shareholder support, the steelworkers' unions also backed the deal. "I can say the steelworkers approve of our transaction and support it. It's full steam ahead."

The companies did not say what role Stelco CEO Rodney Mott would play after the acquisition and Surma said only: "He can speak for himself." When called by Reuters, Mott's office said he was tied up with meetings.

Surma said that the U.S. company would acquire Stelco's Lake Erie Works in Nanticoke, Ontario, which produces some 2.9 million tons per year, and the Hamilton Works, which produces around 2.6 million tons of steel slabs, or large blocks of semifinished steel.

"This is a very important strategic transaction as it enhances our position in flat-rolled manufacture.

"This brings us to 33 million plus tons, of which about 25 million tons are in North America, making us the fifth-largest steelmaker in the world," said Surma.

A company spokesman said ArcelorMittal, Nippon Steel Corp, Tata Steel and JFE Holdings make more steel.

Most of U.S. Steel's steelmaking capacity is flat-rolled steel, used in the manufacture of automobiles, airplanes and appliances. Asked whether U.S. Steel would sell off any assets, such as Stelco's bar-making capacity, Surma said it was too early to say.

Stelco's slab production of approximately 900,000 tons per year would fit nicely with U.S. Steel, which has excess capacity at its rolling mills. "If North American flat-rolled demand continues to gain, then the overall position of those who have slab capacity will be substantially enhanced."

U.S. Steel projects the deal will bring annualized pretax

synergies of more than $100 million by the end of 2008. The transaction should boost earnings per share in 2008, excluding synergies and the impact of purchase accounting adjustments.

U.S. Steel would guarantee pension funding obligations under an agreement between Stelco and the province of Ontario and would also make a voluntary contribution of approximately $31 million to Stelco's main pension plans.

Analysts have said Stelco's stock could be overvalued if the company's underfunded pension and other obligations were taken into account. That bill totaled C$1.7 billion in December, though it has likely declined by as much as C$300 million since then as interest rates have risen, Scotia Capital's David Tyerman estimated last month.

Credit Suisse analyst David Gagliano said the deal would be "a logical acquisition ... given Stelco's production mix and physical proximity to U.S. Steel's Midwestern U.S. operating base."

But 23 times projected 2008 earnings "is a fairly steep price to pay, and we suspect it was the price required to get 76 percent of Stelco's shareholders on board."

Analyst Charles Bradford of Bradford Research said Stelco's earnings have been depressed as they rebuilt some facilities and expanded others. "I think the earnings are likely to be a lot higher in coming quarters than they were last quarter."

U.S. Steel shares were up 39 cents at $93.78 in afternoon trade on the New York Stock Exchange. Stelco shares were up C$10.72 at C$37.65 in Toronto.

($1=$1.05 Canadian)

(Additional reporting by Lewis Krauskopf and Steve James)