Cleveland-Cliffs (CLF, Financial) has announced its acquisition of Canadian steelmaker Stelco. The deal includes C$60 in cash plus C$10 (0.454 shares of CLF) for each Stelco share. Upon completion, CLF shareholders will own 95% of the combined company, while Stelco shareholders will own 5%.
- The transaction values Stelco at approximately $2.5 billion (C$3.4 billion) and represents an acquisition multiple of 4.8x LTM Adjusted EBITDA with synergies. CLF expects $120 million in annual cost savings with no impact on union jobs. The acquisition is anticipated to be immediately accretive to 2024 and 2025 EPS.
- Stelco operates two sites in Ontario: Lake Erie Works, the newest and lowest-cost integrated steelmaking facility in North America, and Hamilton Works, a downstream finishing and cokemaking facility. Stelco ships about 2.6 million net tons of flat-rolled steel annually, primarily hot-rolled steel.
- Cleveland-Cliffs is already the largest flat-rolled steel producer in North America. This acquisition doubles CLF's exposure to the flat-rolled spot market and provides cost advantages in raw materials, energy, healthcare, and currency. Stelco's capabilities complement CLF's existing operations and diversify its customer base across construction and industrial sectors.
- CLF has been active in M&A, acquiring AK Steel for $1.1 billion in March 2020 and the US assets of ArcelorMittal (MT, Financial) for $1.4 billion in December 2020. These acquisitions made CLF the largest flat-rolled steel and iron ore pellet producer in North America. CLF also attempted to buy US Steel (X, Financial) last year but was rebuffed.
- CLF noted that Stelco has transformed from an underperforming company to one of the highest margin steel companies in North America. Unlike the ArcelorMittal USA assets that required significant investments, Stelco will be a low capital intensity asset, becoming the lowest cost and highest EBITDA margin flat-rolled asset in CLF's portfolio.
Overall, this acquisition strengthens CLF's position in the flat-rolled steel market. The valuation appears fair, and Stelco has made significant progress in its turnaround. While manufacturing activity remains weak and Stelco uses higher-cost union labor, the deal's timing could be favorable if the Fed cuts rates soon, potentially boosting the manufacturing sector as the deal closes in Q4.
