Bidding for the former Stelco has come down to two companies with plans to operate the steel plants in Hamilton and Nanticoke.
Sources with knowledge of the process confirm Essar Group of India and KPS Capital Partners LP of New York have entered the final stage of bidding for troubled U.S. Steel Canada.
KPS is also in the running to buy EssarAlgoma Steel, also in creditor protection. That raises the potential for a merger of the two companies.
While details of the bids are hidden behind the nondisclosure agreement participants signed as a condition of entering the auction, sources say both bidders intend to operate and invest in the Hamilton mill where basic steelmaking ended in 2010.
"This process is really down to two going-concern bidders," said one source, who was not authorized to speak about the matter publicly. "Essar and KPS are the only two strategic bidders."
Any buyer of U.S. Steel Canada must clear two major hurdles: settling its enormous pension funding shortfall and satisfying the secured debt claims of parent company U.S. Steel.
Stelco's four main pension plans are short $830 million. The United Steelworkers, which represents many of the 20,000 area retirees, has said it will support any bid that solves that problem.
U.S. Steel, which acquired Stelco in 2007, has debt claims of $2.2 billion including $118 million in secured claims. As the largest secured creditor, it has the power to squash any deal that doesn't maximize its debt recovery.
The American company's claims are under appeal.
Essar Group is an India-based conglomerate with interests in manufacturing, shipping, retail and energy. It is best known in North America as owner of Algoma Steel in Sault Ste. Marie. That company, like Stelco, is in creditor protection and Essar was eliminated as a potential bidder in that sales process after failing to provide proof it has the financial resources to complete a purchase of the company.
That causes some sources to wonder if the same weakness could knock it out of the Stelco bidding process.
"The way I've heard it is that Essar is a strategic buyer, and that would be best for Hamilton, but it's all based on borrowed money," said University of Toronto steel expert Peter Warrian. "When Essar acquired Algoma they just loaded it up with debt."
"Essar is in terrible financial shape. There's a lot of skepticism about their financial ability," another source said. "The issue is that their modus operandi is to use debt and extreme leverage. If they do that again, Stelco will be right back on the ropes in a few years."
Essar has access to some cash it didn't have during the Algoma bidding process. Earlier this month, it sold a 49 per cent stake in its oil business to Russian oil company Rosneft in a multibillion-dollar deal (the exact amount wasn't disclosed).
"That will finance the (USSC) deal at least in part," a source said.
Another warned, however, that at least part of that money is earmarked to pay $2.6 billion in oil dues owed to the government of Iran.
KPS is a New York City hedge fund with a reputation for fixing broken companies, holding them for two to four years and then selling them at a significant profit. Past successes have included adult diaper maker Attends Healthcare, Ireland's Waterford Wedgwood, maker of Wedgwood and Royal Doulton china and Waterford crystal, and Winnipeg-based bus maker New Flyer.
"KPS has a long history of reviving troubled companies," a source said. "They have a very constructive history."
For Warrian, the proposed deals present a stark choice.
"If your concern is the future of the steel industry in Hamilton then the Essar bid is the more appealing," he added. "If you look at a straight financial decision then it tilts toward the capital guys."
McMaster University business professor Marvin Ryder likes the KPS plan, although he fears how the hedge fund would pay for the acquisition.
"KPS could be a viable deal. This is like the Stelco that emerged from bankruptcy protection being owned by a venture capital company. But KPS is only going to do this if it feels it can make money here," he said in an email exchange. "Suppose it pays $2.2 billion. OK, U.S. Steel gets paid, but how does KPS make money? It would have to sell the pieces for $2.5 billion."
Any deal, he added, depends on U.S. Steel's approval as the largest secured debt holder.
"This might just be an exercise in futility," he wrote. "Remember, like the first sales process, the second process could end up with no winner."
The first effort to sell USSC failed after the company declared no acceptable offers were received. Bids are now being evaluated by Stelco's court-appointed monitor and financial adviser. They will then recommend a buyer for court approval.
Source: thespec