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Severstal outlines proposal

May 21, 2008
By PAUL GIANNAMORE, Business editor
WHEELING — Russian steelmaker OAO Severstal says its agreement with the United Steelworkers is part of an advantage its $17 a share offer has over a similar offer from India’s Essar Steel Holdings.

Severstal announced its offer for Wheeling-Pittsburgh Steel Corp.’s parent late Tuesday morning and said an agreement had been “substantially finalized” a day before the announcement of an offer from Essar on April 30.

Severstal and Essar both offer $17 a share for Esmark, about $670 million, but the USW has issued strong opposition to the Essar deal, saying the company failed to reach agreement with the union before an April 30 announcement of the deal. Essar and Esmark already have entered into interim financing and Essar has said it would assume all of Esmark’s outstanding debt as part of the deal.

Gregory Mason, chief executive of Severstal International, said in a letter to James P. Bouchard, Esmark’s chairman and CEO, and to the Esmark board, that the Severstal offer “has the full and enthusiastic support of the USW, and Severstal and the USW have entered into an agreement that satisfies the successorship clause of your collective bargaining agreement.”

“We have been informed by the USW that it will waive its right to bid provisions in the collective bargaining agreement with respect to our proposal,” Mason wrote.

Severstal released the text of Mason’s letter along with its announcement of the $17 per share offer.

Severstal said it has developed a “highly credible restructuring plan designed to derive maximum value from Esmark, including a five-year capital improvement plan that carries the full support of the United Steelworkers.”

Ken Aspenleiter, president of USW Local 1190, said Tuesday morning, “Now we have another bid. It’s up to the board of directors and ultimately the shareholders.”

Esmark spokesman Bill Keegan said, “We have received the offer letter from Severstal and are reviewing (it.)” Keegan said Essar’s offer included assumption of debt, placing its value at about $1.1 billion.

He said Bouchard “will be reaching out to Severstal’s Gregory Mason to discuss their offer and how it can provide the greatest value for shareholders and the future of the Ohio Valley.”

Mason said he hopes to work with Esmark and its board to negotiate an acceptable merger, but “we believe that it is critical to give Esmark’s stockholders a chance to decide for themselves and that they will find Severstal’s proposal much more compelling than the Essar Steel transaction.”

Esmark and Essar’s interim financing arrangement has Essar supplying about $110 million to repay the $79 million still outstanding on a government-backed loan to Wheeling-Pitt in 2003 and for operating capital. The Essar deal also includes a $20.5 million fee to be paid if a third party ends up buying Esmark, as well as giving Essar the right to buy 3 million shares of Esmark stock at $12.50 per share.

John Dudzinsky, a spokesman for Severstal, said Tuesday afternoon the company couldn’t comment on the separation fees in the Essar agreement.

Severstal said it believes its offer could be consummated in 40 days after an agreement is entered with Esmark on a merger. In his letter to Bouchard, Mason said Severstal is prepared to enter into substitute interim financing arrangements when a definitive merger is inked.

Esmark said in a statement Tuesday morning regarding the USW’s stance on Essar that the Steelworkers have been involved in the sale process since February.

Mason’s letter states Esmark’s addition to Severstal’s North American business will unlock opportunities between Severstal plants in Dearborn, Mich., the former Rouge Steel complex; Sparrows Point, Md., which Severstal is buying for $810 million from ArcelorMittal; and the SeverCorr mill in Columbus, Miss.

Mason reiterates a view that had been stated by Bouchard during Esmark’s failed attempt to buy Sparrows Point: That slabs from the Maryland mill could be used to supplement existing capacity in Mingo Junction to run the hot strip mill nearer to its capacity.

In addition, Mason writes, that a supply of wide hot-band steel from Esmark to the Dearborn mill could “substantially broaden the customer value proposition of the combined companies.”

Mason said further benefits of the merger also could be realized with Severstal’s announcement last Friday of its purchase of WCI Steel in Warren.

Severstal said the acquisition of Wheeling-Pitt and Esmark would make the Russian firm the fourth largest steel producer in the United States, with annual capacity of 11.3 million tons.

Mason’s letter also states, “As you know, we had substantially finalized the terms of such an agreement, as well as the terms of interim Esmark liquidity financing arrangements, on April 29.”

The announcement of the interim financing and the deal from Essar was announced April 30.

The Steelworkers did not issue their response until Friday afternoon.

However, union officials had indicated in early April that the USW was in talks with Severstal about buying Wheeling-Pittsburgh. The Russian firm and Esmark never commented on the statements, and the union backed away from them within a day.

Dudzinksy said he could not discuss the five-year plan.

“We’re not disclosing anything until there actually is a merger agreement,” Dudzinsky said. “We have entered into an agreement with the Steelworkers that we believe satisfies the successorship clause in the existing labor agreement. Without the union’s support, this deal is not going to get done.”



(Giannamore can be contacted at pgiannamore@heraldstaronline.com.)

 
 

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