Friday, June 29, 2007
Steel may not be a hugely cyclical business for much longer.
Prior to 1970, most of the world's steel producers were primarily government-owned enterprises or smaller privately held firms. Because of this, the industry was fragmented, resulting in erratic swings of profitability and bankruptcy.
However, in 1970 steel began the first of three phases of consolidation. The first, from 1970 to 2000, was national in scope. During this phase, smaller firms were snatched up to form larger national steel companies, such as Nippon Steel, British Steel, and ThyssenKrupp.
The next phase, from 2000 to 2005, saw the emergence of regional and continental consolidation. During this period, national companies began acquiring their regional competitors. Mittal Steel, International Steel Group, and U.S. Steel were key players during this phase of consolidation.
For instance, in 2002 International Steel Group (ISG) bought both LTV Steel and Acme Steel. And in 2003, ISG closed its acquisition of Bethlehem Steel. That same year, U.S. Steel bought National Steel following the latter's bankruptcy.
Last year, the steel industry entered its international phase of consolidation when Mittal Steel bought Arcelor for $32.5 billion, making the combined company the largest steel producer in the world by a factor of three. As Lakshmi Mittal, president of the board of the combined company, explained during a presentation six months ago, consolidation will result in more sustainable margins by and smooth out cyclicality.
Other large steel producers quickly took the plunge into globalization. Evraz Group, a Russian steel maker, bought American producer Oregon Steel Mills for $2.3 billion.
The deals are far from over.
In just the past few months, Essar of India purchased Algoma, a Canadian-based supplier for $1.6 billion. Another Canadian firm, IPSCO, was snatched up by Sweden's SSAB for $7.7 billion. Also making headlines was Ternium's $1.7 billion acquisition of the Mexico-based Imsa.
I believe that the next steel company to get bought out will be processor/distributor Ryerson. At least, it seems Ryerson's management hinted at it in a May 11, 2007, SEC Form 8-K, Item 5.02.
SEC Form 8-K, Item 5.02 concerns the election, appointment, departure, and most importantly, compensation of a company's officers. This is the form that details the severance packages a company's officers receive during a change in control.
To see a company alter this out of the blue is often times a good indicator that the company has received an unsolicited bid for its business. Inside Strategist pick Oakley filled out a similar form in early June. One month later, Italy-based Luxottica Group purchased the company. We'll pocket 65% when the deal closes later this year.
In Ryerson's case, the company specified that, should it be taken private, its officers will not necessarily be forced to retire. It also covers in great detail the severance packages its officers shall receive should the company be bought out and its officers' employment become no longer needed.
Whether or not Ryerson will be purchased or taken private remains to be seen. The company became embroiled in a proxy battle with activist hedge fund Harbinger Capital last January. Harbinger, which owns 9.6% of Ryerson's outstanding shares, argues that Ryerson has underperformed its competitors and needs to overhaul its board of directors.
The battle heated up in March when Ryerson delayed its annual shareholder meeting and hired UBS to help it explore "strategic alternatives." Seeing the company alter its executives' severance packages regarding a "potential change in control" only two months later has got to make you wonder what UBS and Ryerson are cooking up...
Of course, the alteration could simply be to offer Ryerson's execs a sweet deal should Harbinger succeed in replacing seven of its directors on August 23. But given the wave of steel buyouts and acquisitions in the last couple months, I'm tempted to bet that Ryerson has found a potential buyer.
Add this one to your watch list. Form 8-K says fireworks are on the way...
Detroit lives! Automobile stalwarts Ford and General Motors hit 52-week highs.
Small-cap copper and gold miners Ivanhoe Mines and Northern Orion at highs.
Tech blue chips Oracle and Dell at new 52-week highs.