The merger between Cleveland-Cliffs Inc. and AK Steel Holding Corp. for $1.1 billion will result in Cleveland- Cliffs shareholders owning 68% of the shares and AK Steel shareholders owning 32% of the combined company. Lourenco Goncalves, CEO of Cleveland-Cliffs, will lead the expanded organization.
The transaction will combine Cleveland-Cliffs, the largest producer of iron ore pellet in North America, with AK Steel’s production of flat-rolled carbon, stainless and electrical steel products
According to CNN, although the price is a “premium from AK Steel's recent valuation, that's less than half the stock's value from early 2018 after President Trump first announced he would place tariffs on steel and aluminum imports in an effort to help those industries. It's roughly a third of the price of the stock the day he took office."
The deal came the day after President Trump threatened a new round of tariffs on steel and aluminum imports from Brazil and Argentina.
“We are creating a premier North American company, self-sufficient in iron ore pellets and geared toward high value-added steel products,” Goncalves said in a statement.
He continued, “The pro forma Cleveland-Cliffs will be a vertically integrated steel company that is expected to drive improved profitability for existing Cliffs and AK Steel shareholders and is well-positioned to serve both the blast furnace and electric arc furnace segments. In addition, Cleveland-Cliffs’ existing strong balance sheet and self-sufficiency in pellets for the combined company provide flexibility to pursue additional growth opportunities, including the potential future utilization of the blast furnace in Ashland to produce merchant pig iron, an opportunity neither company could pursue on a standalone basis.”
The issue of the potential of opening the furnace arose in a call with investors and according to CNN, Goncalves did not give a firm date for starting the mill. He said that decision, " all depends on the clients. We'd love to generate jobs there. But the clients need to understand that we don't work for free, and we have to earn our cost of capital."
Furthermore, he told investors that this deal gave AK Steel a “competitive advantage in a troubled industry. AK Steel is going to survive," he vowed.
In announcing the merger the companies spelled out the strategic and financial benefits of the merger:
- Brings together complementary businesses to create company with full suite of value-added products: The combination will create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through market cycles. The integrated supply chain provides AK Steel self-sufficiency in iron ore supply. Together, Cliffs and AK Steel will have a presence across the entire manufacturing process, from mining to pelletizing to the development and production of finished high-value steel products, including Next Generation Advanced High Strength Steels for automotive and other markets.
- Solidifies demand for Cliffs’ pellet offtake, with potential for growth into merchant pig iron: The combined company will ensure pellet volume commitments to AK Steel’s blast furnaces along with Cliffs’ Toledo hot briquetted iron facility, to complement its existing long-term minimum volume pellet offtake agreements with other key integrated steel producers. Further, the potential startup of pig iron manufacturing at AK Steel’s facility in Ashland, Kentucky would create future opportunities for pellet demand and more metallics products without significant additional capital expenditures.
- Accretion through significant annual synergies: The transaction offers significant potential for operational synergies, which will contribute to long-term value creation for investors. The combination is expected to generate approximately $120 million of annual cost synergies to be fully realized within the first 12 months after closing, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies.
- Stronger company with compelling pro forma financial metrics: The combined company is expected to benefit from a larger and more diversified base of customers, with less overall emphasis on commodity-linked contracts. For the last twelve months, the pro forma combined company has generated net revenue of $8.2 billion1, Adjusted EBITDA of $1.3 billion2 and unlevered free cash flow of $923 million2,3. The transaction will also be leverage-neutral with pro forma Total Debt to Adjusted EBITDA of 3.5x.
