NLMK Buys U.S. Firm for $3.5Bln

Novolipetsk Steel said Wednesday that it agreed to buy John Maneely Company, the United States' largest independent steel pipe and tube manufacturer, for $3.5 billion in the biggest North American purchase ever by a Russian metals company.

Novolipetsk, also known as NLMK, said it would acquire 100 percent of JMC from Carlyle Group, the world's second-largest private-equity firm, and the Zekelman family, as Russia's metals giants continue to buy up the continent's steel assets.

The deal, which is to be approved by the U.S. Committee on Foreign Investment, is expected to be closed in the fourth quarter of 2008 and create synergies worth $35 million per year, NLMK said in a statement on its web site.

"We are delighted to have secured entry into the highly attractive U.S. pipe and tube market," NLMK chairman Vladimir Lisin, who owns an 85 percent stake in the company, said in the statement.

JMC produces pipes and tubes used in construction, infrastructure and utilities at its 11 plants in the United States and Canada. For the 12 months ending June 30, it shipped 2.1 million tons of pipe and had earnings before interest, taxes, debt and amortization of $485 million.

"The acquisition of JMC fits with NLMK's stated strategy of portfolio diversification and downstream integration in the core markets of the company. It strengthens NLMK's position in North America and provides an entry point into an important and high-margin end market," the statement said.

The transaction will be funded by a $1.6 billion pre-export finance loan and a $2 billion bridge loan organized by Merrill Lynch, Deutsche Bank and Societe Generale.

NLMK closed down 0.63 percent Wednesday at 103.67 rubles on the MICEX exchange.

The steelmaker already operates two U.S. manufacturing facilities, Sharon Coating and Duferco Farrell, as part of its $1.6 billion joint venture with Swiss steel producer Duferco Group. One of the group's facilities supplies JMC with hot-rolled coil and is located near JMC subsidiary Wheatland Tube.

"Our strategy is aimed at a further vertical integration of the company's assets in key markets, including North America," NLMK said in an e-mailed response to questions. "We're looking for highly effective steel-roll assets abroad, as they allow us to explore new prospective markets, diversify our business and decrease risk."

It said it was particularly interested in North America because nonresidential construction had been increasing in recent years and it expects the sector to grow by 4.4 percent annually over the next five years.

U.S. steel-sheet prices rose to a record $1,068 per ton in July after producers took advantage of lower imports and inventories to pass on higher raw-material costs, Purchasing magazine said July 31.

Maxim Semenovykh, a metals and mining analyst at Alfa Bank, said the deal was logical, as JMC's products will remain in demand and NLMK was buying a debt-free asset.

"The price is good. ... Infrastructure in the United States is underdeveloped and will be actively growing in the next 10 to 20 years," he said.

"The Russian market is quite consolidated, and there is not very much left to buy in the metals sector," Semenovykh said. "The U.S. metals market is more stable, and Novolipetsk can also borrow U.S. manufacturers' technologies for its Russian enterprises."

Mikhail Seleznyov, of the Deutsche Bank, was more pessimistic, however. He said the deal could spoil the NLMK's consolidated profitability of 44 percent, the highest in the Russian metals sector. "Novolipetsk should be more worried about its own resource base at home, rather than spending huge sums of money on foreign acquisitions."

Russian steelmakers have been active on the North American market in recent years, buying up plants at attractive prices on the back of a weaker dollar.

Severstal, Russia's biggest steelmaker, has grown into the fourth-largest producer of steel in the United States after buying a mill in Dearborn, Michigan, WCI Steel in Ohio, the Sparrow Point plant in Baltimore and building its own plant, SeverCorr, in Mississippi. Most recently, Severstal beat out Indian steelmaker Essar in June to purchase Esmark for $1.25 billion. The deals earlier this year for the Sparrow Point and WCI Steel plants were worth $950 million.

Evraz, Russia's second-largest steelmaker, has made purchases of $5.3 billion in North America over the last two years, buying Oregon Steel Mills, Claymont Steel Holdings and Canadian firm IPSCO.

JMC "is quite a profitable company sold for a good price," said Vladimir Zhukov, a metals and mining analyst at Lehman Brothers. "Evraz has also been buying successful companies in the United States, while Severstal has been pursuing a different policy, purchasing bankrupted plants at quite low prices."

Zhukov added that all the Russian steelmakers active in the United States have been buying niche production assets to diversify their portfolios.