Call it a tale of two steel companies.
One has a record of broken promises, shuttered plants and labour relations based on confrontation. The other has a legacy of investment in a struggling company, expansion and a deep commitment to its community.
The contrasts between Essar Steel, of India, and U.S. Steel, of Pittsburgh — the foreign owners of the Algoma and Stelco mills, respectively — are stark. Small wonder then that news this week Essar is a likely bidder for the Stelco plants has caused such excitement in a mill that has endured little but bad news for the last eight years.
Both companies came to Canada in 2007 — Essar bought Algoma in April and U.S. Steel acquired Stelco in August. The prices of both deals were about the same — $1.9 billion in cash and assumed debt for Stelco and $1.8 billion in cash for Algoma in Sault Ste. Marie.
That's where the similarities end, however. Stelco was just out of a tortured two-year restructuring under creditor protection and was owned by three hedge funds anxious to take their profits and move on to the next deal. Algoma was a public company and while there had been financial trouble over the years, including two trips through court-supervised creditor protection, it was profitable and had a strong balance sheet when sold.
News of Essar's interest in the Hamilton and Lake Erie works of U.S. Steel Canada surfaced last week after sources with direct knowledge of Essar's business confirmed what has been widely rumoured for months.
The sources are bound by the confidentiality agreement covering USSC's sales process.
The only confirmation of a bid is a June acknowledgement by Essar that it had signed a confidentiality agreement required as part of the bidding process for U.S. Steel Canada. That process is now in a second stage where final bids for the Stelco assets are being evaluated by USSC's chief restructuring officer, financial adviser and court-appointed monitor.
Essar will not confirm its bid moved to the second stage.
If the family-owned company based on Mumbai were to emerge as the new owner of the Stelco plants, what might it bring to Hamilton?
Since taking over Algoma, Essar has invested more than $790 million in Sault Ste. Marie's largest employer and recently announced a $240-million expansion and modernization program. The federal and provincial governments are contributing a combined $60 million to that project.
U.S. Steel promised to invest $250 million in its plants here but will not confirm if any of that money has been spent.
On the labour side, USSC has wrested contract changes from its Canadian workforce by locking out Nanticoke workers twice since 2007 and Hamilton workers once. The Hamilton confrontation lasted 11 months. During those times, Canadian customers were serviced from the company's American plants.
Essar's labour experience in the Sault has been sharply different. It has negotiated three contracts with the United Steelworkers since 2007 without a strike or lockout.
"We have always been able to find enough common ground with them to get an agreement," said Mike Da Prat, president of Local 2251. "They're certainly not pushovers, but they do appear to be committed to making it work here.
"When we negotiate, I think of those western movies where we're ranchers and they're the guy in the suit with the slick lawyer who can hire a gunslinger," he said.
Da Prat added the union-Essar relationship hasn't been without issues — there's a robust debate today over some health and safety policies, discipline issues and what he thinks is the shortchanging of preventive maintenance of equipment — but the debates are marked by a lack of bitterness.
"We're dealing with a pile of arbitrations now and I think they're letting the preventative maintenance slip, but I don't get the sense they just see this place as a cash cow," he said. "I'm not saying it's all good or all bad, but in some ways Essar has a better relationship with the city than Algoma did."
The real difference between the companies and their attitude to their Canadian acquisitions was shown when the bottom fell out of world steel demand in late 2008 as the world plunged into its worst economic crisis since the Great Depression of the 1930s.
USSC responded to the downturn with a sweeping round of layoffs — in March 2009 it slashed 1,500 jobs and a year later shut down its Hamilton blast furnace, ending steelmaking at the plant after a century. The shutdown was later made permanent.
It was a different story in Sault Ste. Marie.
"Operations here were reduced, but it was a very short-term thing; they kept the place going," Da Prat said. "They really appear to be committed to making it work here."
Tom Dodds, executive director of the Sault Ste. Marie Economic Development Corporation, said while jobs were lost at the plant, the cuts were all achieved through attrition.
"It's almost as though they have an unspoken no-layoff policy," he said. They've cut about 700 jobs since taking over, but it has all been done through attrition." Today the plant employs about 2,900.
Where U.S. Steel's relationship with Hamilton has been tense at best, it has also made some financial contributions to local agencies as required by agreements with the federal government.
Essar, Dodds said, has been open-handed with the Sault, contributing to its hospital, university and community college and buying the naming rights to its arena.
Most importantly, he said, there has been open communication with the city.
"With Algoma, we always had a bit of a standoff relationship in the past," he said. "Now we can just pick up the phone and address problems right away."
In Hamilton, however, USSC executives flatly refused to meet with city council early in the restructuring process to ease local fears.
As exciting as an Essar takeover may seem for some, McMaster University business professor Marvin Ryder warns USSC's court-supervised creditor protection isn't about finding a solution that's good for Hamilton.
Its only goal is to get the maximum amount of money possible from the assets for stakeholders, including pensioners, creditors and shareholders.
"The judge's mandate in a case like this is crystal clear," Ryder said. "The judge is simply going to ask, 'Where can I get the best value?'
"The judge won't care about what's good for Hamilton, the pensioners or anyone else," he added. "The judge is only going to care about who is owed money and in what order."
Aside from that, Ryder wondered if Essar is really a big enough player to take over USSC.
Among other points, it's not in the top 25 largest steel companies in the world and continues to experience financial troubles — only last year it went through court-supervised financial restructuring that trimmed its gross debt by $240 million. That plan also required the parent company to put more than $400 million US into Algoma by infusing new cash equity and converting existing obligations into preferred equity.
In 2013, it got the provincial government to agree to a special pension funding plan that stretches top-up payments through to 2024 rather than over the usual five years.
Those financial troubles, Ryder said, raise important questions about the company's strength and its capacity to close a deal to buy the Stelco plants and to pour in the capital they'll need to get back into production.
"Essar just doesn't seem to generate enough cash on its own to do any of things it will have to do," he said. "From a business standpoint, they're just not a huge player compared to something like Mittal that has a lot more weight behind it."
The bidding process for USSC assets has been shrouded in secrecy since the beginning. The court-appointed monitor has said only that 102 companies were invited to look at the assets and 39 submitted expressions of interest. Those bidders were described as "global and North American steel producers, coke producers, steel and metal industry participants, land redevelopers, and private equity and financial investors."
It is known the Hamilton Port Authority was one such bidder, but the agency won't acknowledge now whether it moved to the second stage of bidding.
There is no deadline for the monitor to report on the next stage of the process. Ryder speculates it may be as far away as Labour Day, or even Thanksgiving.
Source: The Hamilton Spectator
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