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04. May 2007

IPSCO to be acquired by Sweden's SSAB; global steel sector consolidation continues

Canada's IPSCO Inc. and Sweden's SSAB Svenskt Stal yesterday announced that they have entered into an agreement, under which IPSCO is to be acquired by SSAB for $160/share in cash, for a total equity value of $7.7bn. The deal has yet to be approved by IPSCO's shareholders. In early April, Evraz Group was viewed by many as a potential suitor for IPSCO.

IPSCO is a leading producer of energy tubulars and steel plate in North America, with an annual steel making capacity of 4.3mn tons.  The company's pipe mills produce a wide range of seamless and welded energy tubular products including oil and gas well casing, tubing, line pipe and large diameter transmission pipe. SSAB is one a major producer of Quenched & Tempered heavy plate and EHS/UHS steel sheet in Europe with shipments of 3.1mn tons in 2006.

Based on the announced transaction price, IPSCO is valued at a 2007F EV/EBITDA of 7.7X (more than the North American average of 7.0X and substantially ahead of the 5.1X average for Russian steel producers). We note that Evraz Group recently acquired Oregon Steel at a 2007F EV/EBITDA of about 6.6X. Finally, SSAB is planning to pay $1,790/ton of IPSCO's capacity, which is more than the $1,095/ton of the Evraz-Oregon deal, or the $990/ton paid by Arcelor for Dofasco. 

As of May 03, 2007 Price (com.), Mcap, EV, EV/EBITDA P/E P/OCF
$ $mn $mn 2006F 2007F 2008F 2006F 2007F 2008F 2006F 2007F 2008F
Russia
NLMK 2.79 16,715 16,395 6.3 6.6 7.6 10.5 10.8 12.8 10.5 7.5 8.9
Severstal 13.7 13,806 14,265 4.8 4.2 4.7 11.7 8.7 10.4 8.0 4.9 5.3
Evrazholding 35.0 12,233 13,572 5.5 4.8 6.6 8.9 8.0 11.5 5.6 6.4 8.0
MMK 0.96 10,205 9,618 4.4 4.2 5.8 6.8 6.5 9.5 6.6 5.6 7.4
Mechel 34.4 4,684 4,883 4.9 4.7 5.9 7.9 7.4 9.9 5.4 5.8 7.1
Weighted average       5.3 5.1 6.2 9.6 8.7 11.1 7.8 6.2 7.5
Emerging markets
POSCO 422 36,777 37,781 5.8 5.2 4.6 10.1 9.3 8.0 14.9 6.0 5.4
Baoshan Iron & Steel 1.45 25,397 27,984 7.0 5.9 5.3 16.0 12.8 11.3 7.9 7.1 6.4
Gerdau Metalurgica 20.8 12,734 18,553 7.5 6.5 6.2 8.8 8.4 7.9 10.0 9.2 8.2
Companhia Siderurgica Nacional 43.4 11,772 16,376 8.9 7.4 6.5 13.5 10.1 8.9 10.3 7.5 6.9
Usinas Siderurgicas de Minas 50.0 12,050 12,430 5.3 5.4 6.2 10.1 9.4 9.5 18.1 17.8 13.9
Tata Iron & Steel 13.5 7,847 8,562 6.1 5.2 4.6 9.5 7.9 7.3 7.4 6.7 6.5
Eregli 11.5 5,606 6,675 8.5 6.7 5.8 13.5 10.8 8.8 6.7 6.7 6.2
Weighted average       6.7 5.8 5.4 11.8 10.1 9.0 11.7 8.1 7.1
Developed markets
Nippon Steel 6.76 46,045 57,592 N.A. 9.0 8.4 N.A. 16.3 15.2 N.A. 9.9 9.4
JFE Holdings 57.5 35,159 44,845 N.A. 7.7 7.4 N.A. 13.8 13.3 N.A. 8.4 7.6
Mittal Steel 54.2 75,426 103,701 6.6 6.0 5.5 9.3 8.3 7.3 7.8 6.7 6.0
Nucor 65.5 19,501 19,599 6.2 6.1 6.4 11.5 12.0 12.5 9.6 10.2 9.4
Corus 11.9 11,270 10,851 6.9 6.6 6.7 16.8 14.7 14.9 10.1 8.2 7.4
USX-US Steel 105 12,256 11,902 5.3 5.9 6.0 9.2 10.5 11.5 7.2 7.5 8.5
IPSCO 157 7,022 8,064 8.1 7.6 6.9 11.5 11.9 10.7 9.9 10.0 9.3
Weighted average       6.5 7.0 6.7 10.4 12.0 11.4 8.3 8.3 7.7

Increasing multiples indicate that as the global consolidation process continues, the prices that buyers pay for their targets are likely to rise; nevertheless, Russian steel majors to look significantly undervalued based on recent acquisitions.

As we have stated previously, we expect global consolidation in the steel sector to continue, with companies in emerging markets such as Russia playing a key role in this process. Based on the number of companies, the steel sector continues to be the most dispersed in the metals and mining segment, and therefore the integration should eventually lead to the creation of several major players with total capacity of about 500mn-700mn tons, which would allow them to control more than 30% of the market.  Among the Russian companies most likely to be active in this consolidation process we see Severstal (Buy, end-2007 fair value $15.5), Evraz Group (Hold, $35), and NLMK (Hold, $3.08).

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