March 2, 2011 / 2:20 PM / 9 years ago

UPDATE 3-Renco buys 3 Severstal U.S. mills in $1.2 bln deal

* Renco acquiring Sparrows Point, Warren, Wheeling mills

* Deal valued at $1.2 bln, including $650 mln in debt

* Severstal bought the mills for about $2.7 bln-analyst

* Renco’s RG Steel will have 7.5 mln T annual capacity

* Severstal shares up 3.1 pct in Moscow (Adds Maryland governor’s comments, Renco comment on union)

By Alfred Kueppers

MOSCOW, March 2 (Reuters) - New York-based investment company Renco Group said on Wednesday it agreed to buy three of Russian steelmaker Severstal’s (CHMF.MM) U.S. mills to create its own flat-rolled steel business in a deal valued at $1.2 billion.

The new unit, RG Steel, will be the fourth-largest producer of flat-rolled steel in the United States and take its place beside other Renco assets, such as Humvee maker AM General.

Severstal said separately that it would receive $125 million in cash, a $100 million secured note and repayment of $317 million of third party debt. Renco will assume Severstal liabilities totaling $650 million.

The deal allows Severstal to close a chapter on its difficult entry into the North American steel industry.

In the third quarter, its North American operations had a loss before interest, tax, depreciation and amortization (EBITDA) of $59 million, compared with a profit of $59 million in the second quarter, reflecting what it called a “challenging U.S. steel market.” [ID:nLDE6AF0J6]

Investors reacted positively to Wednesday’s announcement, sending the shares up 16.8 roubles ($0.59) or 3.1 percent to 552.8 roubles on Moscow’s MICEX. The exchange’s overall index was up 0.4 percent .MCX.

“Finally they got rid of these assets,” Raiffeisen Centrobank analyst Iryna Trygub-Kainz said. “They were loss-making and negatively influencing the consolidated EBITDA of the company.”

Severstal acquired the mills during an aggressive push into the North American market in 2008 during the height of the pre-recession steel boom. After the steel market collapsed, the company, which had been accused of overpaying for the assets, was forced to idle a large part of its U.S. operations.

Deutsche Bank analyst Olga Okuneva estimated that Severstal spent $2.7 billion on an enterprise value basis for the assets, meaning it would book a hefty loss on the sale to Renco. Enterprise value includes market capitalization and debt minus cash.

The Russian company, controlled by billionaire Alexei Mordashov, will remain a force in the U.S. steel market, operating plants in Dearborn, Michigan, and Columbus, Mississippi, with a total annual capacity estimated by analysts at about 5 million tonnes.

“Now the company can focus on Dearborn and Columbus,” Trygub-Kainz said. “If demand revives sharply we will see an improvement in Severstal’s North American operations this year.”

Renco will acquire mills in Warren, Ohio, Wheeling, West Virginia, and Sparrows Point, Maryland. This will provide its RG Steel unit with 7.5 million tonnes of annual capacity.

Maryland Gov. Martin O’Malley hailed the sale as a sign that the Sparrows Point mill would soon be restarted.

“For generations, Sparrows Point has been a major employer and a significant economic asset for the state,” O’Malley said in a statement. “We welcome RG Steel and its headquarters to Maryland and stand ready to help the company and the United Steelworkers return, retrain and retain nearly 2,000 steelworkers in Sparrows Point.”

Renco Group said in a statement that RG Steel had executed a new collective bargaining agreement with The United Steelworkers union (USW), subject to ratification by the union’s members.

The USW, which represents about 6,000 workers at the plants, said it welcomed the sale. “Our members have withstood two years of uncertainty brought about by circumstances beyond their control,” USW International President Leo Gerard said in a statement. “Finally, their patience and solidarity have been rewarded, and the ownership issues have finally been resolved.”

Severstal and Renco expect the transaction to be completed in March. The company will be based in Sparrows Point and it will also hold 50 percent stakes in the Mountain State Carbon coking coal producer and the Ohio Coatings Co.

Evercore Partners is acting as Severstal’s financial adviser, while Renco retained UBS and Metal Strategies Inc. (Reporting by Alfred Kueppers; Editing by Jon Loades-Carter, Mike Nesbit, Toni Reinhold) ($1=28.36 Roubles)

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