Cleveland-Cliffs to acquire Canada’s Stelco

Cleveland-Cliffs Inc. has entered into a definitive agreement to acquire Stelco Holdings Inc., a Hamilton, Ontario-based blast furnace/basic oxygen furnace (BOF) steel producer.

The Cleveland-based steelmaking and mining firm, which has thus far been denied in its effort to acquire Pittsburgh-based United States Steel Corp., has instead arranged to buy assets that once operated as U.S. Steel Canada.

Cliffs says the announced acquisition confirms its “commitment and leadership in integrated steel production in North America," and also brings an additional 1,800 United Steelworkers (USW) employees into Cliffs’ workforce.

According to Cliffs, the transaction represents a total enterprise value of approximately $2.5 billion (CAD$3.4 billion) for Stelco and represents an acquisition multiple of 4.8 times March 31, last 12 months (LTM)-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) with synergies.

Stelco is an integrated steelmaker consisting of two operational sites, both located in Ontario: Lake Erie Works in Nanticoke, which it calls “the newest and lowest-cost integrated steelmaking facility in North America,” and Hamilton Works, a downstream finishing and coke-making facility. The company ships approximately 2.6 million net tons of flat-rolled steel annually, primarily hot-rolled steel to service center customers.

The majority of Cliffs’ assets are in the United States, with the company’s previous toehold in Canada consisting of seven tooling and stamping plants and the former Zalev Bros. scrap processing facility in Windsor, Ontario, that came with its acquisition of Detroit-based metals recycling firm Ferrous Processing & Trading (FPT) in 2021.

“The acquisition of Stelco expands Cliffs’ steelmaking footprint and doubles Cliffs’ exposure to the flat-rolled spot market, with cost advantages in raw materials, energy, health care and currency," Cliffs says of its steelmaking entry into Canada. "Stelco adds capabilities that complement Cliffs’ existing operations and product portfolio, while diversifying its customer base across the construction and industrial sectors. The transaction brings substantial integration opportunities, generating synergies associated with procurement, overhead and public company-related expenses.”

Stelco Holdings and equity funds affiliated with Alan Kestenbaum have owned the Stelco assets since 2017, when the Canadian metals industry financier purchased the mills from a bankruptcy trustee after U.S. Steel had placed the assets into receivership.

Voting support agreements for the transaction have been cast by Kestenbaum, Fairfax Financial Holdings, a Toronto-based equity fund, an affiliate of Lindsay Goldberg, a New York-based equity fund, and each of the other executive officers and directors of Stelco, which collectively represent approximately 45 percent of Stelco’s outstanding shares.

Stelco also has publicly traded shares on the Toronto Stock Exchange, rendering the agreement subject to shareholder approval.

“We believe that any purchase of Stelco must come with commitments to honor our members’ collective agreements, to protect pensions and benefits and to make investments that will protect and create jobs and ensure the long-term viability of the company’s operations," a statement from the USW chapter representing Stelco reads.

That same statement points to potential openness to the transaction from the USW chapter.

“[An] initial, hourlong meeting [with Cliffs CEO Lourenco Goncalves] was cordial and respectful in tone, with meaningful exchanges that led the parties to schedule a more fulsome, face-to-face meeting that will be held this Friday, July 19, in Hamilton,” the USW of Canada says.

Stelco is expected to continue operations as a wholly owned subsidiary, including by retaining an office presence in Hamilton.

“I want to first recognize Alan Kestenbaum and the Stelco team for the remarkable turnaround they executed at Stelco, turning what was an underperforming asset under previous ownership into a very cost-efficient and profit-oriented company,” Goncalves says.

“Stelco is a company that respects the [USW] union, treats their employees well and leans into their cost advantages. With that, they are a perfect fit for Cleveland-Cliffs and our culture. We look forward to proving that our ownership of Stelco will be a net benefit for Canada, the province of Ontario, and the cities of Nanticoke and Hamilton.”

“I know that Cliffs will continue to build upon the excellent work and life environment we have created for all of our employees, and continue to be a reliable supplier to our valued customers, while maintaining Stelco’s stature and reputation in Canada and maintaining our Canadian national interests," adds Kestenbaum, executive chair and CEO of Stelco.

Cliffs and Stelco say the transaction has been structured to provide benefits to and considerations toward Canada that include: maintaining the Stelco name and office presence in Hamilton; committing to capital investments of about $44 million in operations in Hamilton and Nanticoke; ensuring existing local supplier arrangements are maintained; and maintaining ties with local sports franchises the Hamilton Tiger-Cats football team and the Forge FC soccer club.

“I am excited for this transaction and proud to support a deal that is great for the resilience of manufacturing and union jobs in North America," USW International President David McCall says. "Cleveland-Cliffs has a proven track record of making sure the union always has a seat at the table, and this deal was no different. We are delighted to further expand our already great partnership between Cliffs and the USW.”