Severstal Buys U.S. Plants for $1.25Bln

The country's largest steelmaker, Severstal, announced Thursday that it had won a bidding war for U.S. steelmaker and distributor Esmark, agreeing to shell out $1.25 billion for the company.

Severstal, which is picking up $510 million in Esmark debts and loans as part of the price tag, said Thursday that it planned to invest $250 million in the West Virginia-based company over the space of five years to create one of North America's leading producers of flat-rolled steel.

The company's bid of $19.25 per share topped that of $19 from India's Essar Steel Holdings, part of the giant business holding Essar Global. The bid by Severstal, which has a market capitalization of $25.7 billion, represented its initial offer of $17 per share.

Esmark shares were trading at $19.13, down 6.5 percent, early Thursday.

The Russian steelmaker said Esmark would allow it to sell a wider range of steel products in the United States, with Severstal's Sparrows Point plant in Maryland providing semifinished steel slabs to boost production.

"This acquisition positions Severstal as one of North America's leading integrated steel companies," Severstal CEO Alexei Mordashov said in an e-mailed statement Thursday. "With Esmark as part of our U.S. portfolio, we're well-positioned to provide domestic supply to a market with consistent demand for high-quality steel."

Severstal expects "significant operational and financial synergy with its current U.S. operations," the company said in a news release.

Since 2004, Severstal has grown into the fourth-largest producer of steel in the United States, buying a mill in Dearborn, Michigan, which supplies steel to Ford; WCI Steel in Warren, Ohio; the Sparrow Hills plant, near Baltimore; and building its own plant, SeverCorr, in Columbus, Mississippi.

The deals earlier this year for the Sparrow Hills and WCI Steel plants were worth a total of $950 million.

Mordashov has said Severstal was interested in investing in the United States as a hedge against surging raw materials prices. He said he would allow his 82 percent stake in Severstal to be diluted to as little as 40 percent if funds generated by additional stock issues went to further purchases, including major acquisitions in the United States, Bloomberg reported Wednesday.

"We are interested in efficient mining projects that will provide resources both for our own use and for sale," said Sergei Laktionov, spokesman for Severstal Resurs, which supervises the parent company's mining projects.

In 2007, Severstal produced 17.5 million tons of steel globally. With the Esmark purchase, the company expects to produce 11.3 million tons annually in the United States alone.

Analysts were optimistic Thursday about Severstal's North American prospects.

"Severstal is capitalizing on steel pricing and the increasingly competitive cost environment of the U.S. steel sector," said Rob Edwards, chief metals and mining analyst at Renaissance Capital.

"The company has quadrupled its production base in the U.S. to 11 million tons after all the expansions are complete. In 2008 we expect them to capture [earnings before interest, taxes, depreciation and amortization] of $120 per ton in the U.S., a huge year-on-year improvement."

Yevgeny Ryabkov, metals analyst at AntantaPioglobal, said the United States was an important market for Russian steelmakers.

"Russian steelmakers, such as Evraz and Severstal, have become active on U.S. markets over the last few years," Ryabkov said. "It was the most promising alternative to the Chinese market, which is very profitable, but unpredictable due to the country's planned economy."

Evraz owns two steel mills in the United States.

Ryabkov said Russian steelmakers were coming to the United States at the right time.

"Due to the economic crisis, the price for steel production facilities has been falling, while the demand for steel in the United States is growing faster than in Russia," he said.