Severstal got early invite

Steelworkers asked Russian company to consider a deal for Esmark

By PAUL GIANNAMORE, Business editor
WHEELING — Severstal says it was asked by the United Steelworkers in January to consider a business combination with Esmark Inc., parent of Wheeling-Pittsburgh Steel Corp.

The Russian steelmaker initiated its $17 per share offer to buy all outstanding shares of Esmark on Friday, a deal calculated by Severstal to be worth $677.85 million. Assumption of outstanding debt places the deal at about $1.2 billion, the Russian firm said.

Severstal says its offer progressed from $15 a share earlier this year to the current $17 per share, and included an offer of $120 million in interim financing.

Severstal filed documents relating to its tender offer with the Securities and Exchange Commission Friday. Because it has commenced the offer, its filing included a required summary of its version of the history leading up to the offer.

A similar $17 per share offer made by India’s Essar Steel Holdings hasn’t commenced, so documents containing its version of history have not been filed with the SEC. Esmark entered into financing agreements worth $110 million with Essar. The Essar deal doesn’t have support of the United Steelworkers or of Esmark’s largest shareholder, Franklin Mutual Advisers, which recommends presenting the Severstal offer to the board and shareholders. Franklin holds 60 percent of Esmark’s stock.

Severstal said its first letter of offering set a $15 per share price, which was 41.2 percent more than the closing price of Esmark on Feb. 21. Esmark closed that day at $10.62, according to Commodity Systems Inc. records.

The offer, as did further letters, included notes that the company planned $250 million in capital expenditures during the next five years, the offer wasn’t conditioned on obtaining financing, and the restructuring plan had full support of the Steelworkers. Severstal said it included a form of an exclusivity commitment for Esmark to sign to continue working on the deal.

Severstal said Esmark requested information Feb. 29, including plans relating to certain assets, joint ventures and operations of the company and its subsidiaries, expectations regarding wages, benefits and employment levels of union and management, as well as restructuring plan details, operations plans, details of the proposed capital expenditure plan and Severstal’s plans to refinance outstanding debt and location of the company’s headquarters, as well as Severstal’s willingness to consider another type of transaction such as a merger or asset purchase.

On March 4, Severstal said it responded and noted its strong preference was an outright cash purchase.

Severstal said it became aware Esmark was talking to a third party on April 1.

On April 19, Severstal upped its offer to $15.50 a share in cash, now a 46 percent premium over the Feb. 21 closing price. The Russians reiterated USW support, the capital expenditures plan and other points. Severstal said it anticipated providing Esmark a definitive agreement form contemplating a tender offer no later than the morning of April 21. Severstal said it believed an agreement could be finalized later that week with the tender offer to come soon after.

On April 21, Severstal said its outside attorneys submitted the proposed merger agreement to Esmark, contemplating a tender offer, a financing proposal for a $120 million loan to Wheeling-Pitt and Esmark Steel Service Group for refinancing existing debt, working capital and general corporate purposes, as well as the proposed form of the tender offer.

Severstal said it continued working with Esmark to negotiate terms of a proposed merger between April 21 and April 25.

On April 25, Severstal said it issued its third offer letter, setting the price at $16 a share and reiterating other points, including USW support and the capital expenditure plan. Also included was a revised draft of the proposed merger, a support agreement and financing commitment.

Negotiations continued between April 25 and April 29, Severstal said, with the USW sending a letter to Esmark indicating full support of the Severstal offer on April 29. Severstal said that letter noted the Steelworkers did not support the Essar offer and would use their rights, if necessary, under the contract to prevent completion of a transaction with Essar. The USW urged prompt movement with Severstal and ceasing to expend further resources pursuing a transaction that couldn’t be completed.

Severstal said on the evening of April 29, Esmark’s board met separately with representatives of Severstal and Essar, announcing April 30 it had reached a memorandum of understanding with Essar and the $110 million term loan commitment from Essar.

On May 7, Severstal said, senior Severstal managers met with Steelworkers and senior management of Esmark, with Esmark expressing support for the Essar transaction but urging Severstal to continue to pursue its transaction.

Esmark filed documentation with the SEC May 8 noting it entered into a $21 million term loan May 2 with Essar and that Essar acquired the remaining $79 million on Wheeling-Pitt’s federally backed term loan May 5.

The Steelworkers sent a letter May 16 telling the company its agreement with Essar violated the collective bargaining agreement and demanding Esmark repudiate the agreement.

That letter, from USW District 1 Director David McCall, noted Esmark had been considering offers for transactions several times since Feb. 25. The letter didn’t mention Severstal, but it said Esmark had failed each time to notify the Steelworkers, thus placing the union at a disadvantage to prepare a competing bid.

On May 20, Esmark issued a response, saying it observed the spirit and letter of the right-to-bid process. Later that day, Severstal said, it submitted a fourth letter to the board, offering $17 a share and issuing a press release.

Severstal’s release noted it would be the fourth-largest producer of steel in the United States, with 11.3 million tons of annual capacity.

The USW confirmed its support for Severstal May 21 and again said it would prevent the transaction with Essar.

Severstal said Esmark’s attorneys told Severstal’s attorneys May 21 that the Essar agreements were going to be filed with the SEC and encouraged Severstal to consider the terms of the Essar agreements. Esmark, Severstal said, indicated it wanted to discuss terms of interim financing to replace Essar’s but wouldn’t talk further unless Severstal agreed it would wait at least three days before going public with any information about a transaction.

Franklin Mutual Advisers issued their letter of support for the Severstal offer May 22.



(Giannamore may be reached by e-mail at pgiannamore@heraldstaronline.com'>pgiannamore@heraldstaronline.com.)