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|
|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|
|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|
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).