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swedish acquisition of Chicago-area-based Canadian co.

Thursday 19 July, 2007

SSAB Svenskt Staal AB, Sweden’s largest steelmaker, agreed to buy Ipsco Inc. for about $7.7 billion to become North America’s biggest maker of steel plate used in heavy-duty equipment and oil and gas pipelines.

SSAB will pay $160 a share, or 7.2 percent more than yesterday’s closing price for Lisle, Illinois-based Ipsco. The purchase will boost earnings and generate 600 million kronor ($89 million) of annual benefits, Stockholm-based SSAB said today in a statement. The deal may be completed in the third quarter.

Buying Ipsco will more than double SSAB’s output to about 7.4 million tons a year, adding 25 plants in the U.S. and Canada as demand rises for pipe used by energy explorers and plate in trucks and wind turbines. The acquisition follows U.S. Steel Corp.’s decision in March to buy Lone Star Technologies Inc. to gain access to 1 million tons of pipe for energy companies.

“The price tag seems reasonable,” said Lars Soderfjell, a Stockholm-based analyst at ABG Sundal Collier ASA who rates SSAB shares “hold.” “I am struggling to see where they are going to find synergies” of 600 million kronor a year.

The acquisition will make SSAB North America’s largest producer of steel plate, used to build ships and make Caterpillar Inc. trucks. SSAB will also become the second- largest maker of steel pipe for the oil and gas industry, trailing only Pittsburgh-based U.S. Steel.

mm comment: In an indirect way, this is a result of growth in BRIC, or at least China. Demand for this stuff is way up in BRIC & companies like ship-builders & Caterpillar are capitalizing on it. Suppliers to Caterpillar & ship-builders are making these moves.

Purchase Premiums

Steelmakers are paying ever-higher premiums to buy smaller competitors. SSAB’s offer including debt is 7.61 times Ipsco’s earnings before interest, tax, depreciation and amortization, or Ebitda, according to data compiled by Bloomberg. Mittal Steel Co.’s purchase of Arcelor SA last year was for 5.51 times Arcelor’s Ebitda.

“ The bid is a modest premium to IPS’s May 2 closing price, but values Ipsco at the higher end of recent steel industry transactions on an EBITDA basis,” Jarrett Bilous, an analyst at DBRS in Toronto, said today in a note to investors.

SSAB said it secured bank financing for the deal and will sell about 10 billion kronor of stock this year. Ipsco, incorporated in Regina, Saskatchewan, must win approval from holders of at least two-thirds of its shares. A Canadian court will rule on the fairness of the deal.

More Bidders

“The action will force any other potential bidders to surface quickly,” Arnold Ursaner, an analyst at CJS Securities in New York, said today in a note to investors. He’s advising clients not to sell the stock and wait for a higher bid.

Shares of Ipsco rose $8.64, or 5.8 percent, to $157.19 at 4:01 p.m. in New York Stock Exchange composite trading. They are up 50 percent in the past year and 20 percent since Ipsco announced it was in talks with a potential suitor on April 12.

Class A shares of SSAB plunged 13 kronor, or 5.3 percent, to 231 kronor in Stockholm, the biggest drop since Feb. 27. The shares have jumped 48 percent in the past year.

“There was some disappointment that it was not SSAB being bought,” said Claes Rasmuson, a Stockholm-based analyst at Swedbank Markets who rates the shares “neutral.”

Most of the 600 million kronor of benefits will come in the next two years from improved product mix and expansion opportunities in the U.S. and Asia, SSAB Chief Executive Officer Olof Faxander said at a press conference today in Stockholm.

`Niche Player’

“SSAB is similar to Ipsco in that it’s a niche player in the high-value-added end of the plate business,” said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois. “It will also add the energy business.”

About 45 percent of Ipsco’s fourth-quarter sales were to energy companies that buy steel pipe and reinforced metal. The rest came from steel plate and other mill products sold to steel-service centers and customers in construction and transportation.

mm comment: Again, where are energy companies ramping up, (other than oilfields)? None other than the BRIC countries.

SSAB, which sells most of its steel in Europe, will generate almost half its revenue in North America after the takeover. Ipsco had $3.78 billion in North American sales last year, compared with $269 million for SSAB, which generated $4.2 billion globally.

mm comment: they may sell it in Europe & North America, but my suspicion is it’s ending up in BRIC countries.

World steel demand is expected to grow 5.9 percent this year to 1.18 billion metric tons, slowing from 8.5 percent growth last year, according to the Brussels-based International Iron & Steel Institute, which is funded by steelmakers.

Steel industry mergers and acquisitions are almost keeping pace with last year, when their value rose to a record after Mittal acquired Arcelor for $38.3 billion. SSAB’s takeover of Ipsco will push the value of the 142 deals done this year to $32 billion, compared with 122 transactions worth $45 billion in the same period last year, according to data compiled by Bloomberg.

Ipsco said its lead financial adviser was Goldman, Sachs & Co., with RBC Capital Markets as co-adviser. Legal counsel was Davis Polk & Wardwell and Osler Hoskin & Harcourt.

Greenhill & Co. and Handelsbanken Capital Markets are lead financial advisers to SSAB. White & Case is acting as U.S. counsel to SSAB and Bennett Jones is Canadian counsel.

-bloomberg

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