Cleveland Cliffs has entered a merger agreement to acquire AK Steel, West Chester, Ohio. The purchase price is approximately $1.1 billion.
Under the terms of the merger agreement, AK Steel shareholders will receive 0.40 shares of Cliffs common stock for each outstanding share of AK Steel common stock they own. Upon completion of the transaction, Cliffs shareholders will own approximately 68 percent and AK Steel shareholders will own approximately 32 percent of the combined company.
Lourenco Goncalves, chairman of the board for Cleveland Cliffs, will lead the expanded organization. “We are excited to be able to deliver real value to the shareholders of both Cliffs and AK Steel through a value enhancing and leverage-neutral transaction. By combining the best-in-class quality of AK Steel’s assets and its enviable product mix with Cliffs’ debt profile and proven management team, we are creating a premier North American company, self-sufficient in iron ore pellets and geared toward high value-added steel products,” he said.
The transaction will combine Cliffs, North America’s largest producer of iron ore pellets, with AK Steel, a producer of flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The combined company will be ideally positioned to provide high-value iron ore and steel solutions to customers primarily across North America, executives claim.
“We believe this transaction is a compelling opportunity for AK Steel shareholders to participate in the substantial upside potential of what will be a premier vertically integrated producer of value-added iron ore and steel products with significant scale and diversification. Together, we expect to be able to take advantage of growth opportunities faster and more fully than either company could on its own,” said Roger K. Newport, CEO of AK Steel, who will retire upon completion of the deal.
The executives listed a number of benefits of the transaction:
• The combination will create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through market cycles. The integrated supply chain provides AK Steel self-sufficiency in iron ore supply.
• The combined company will ensure pellet volume commitments to AK Steel’s blast furnaces along with Cliffs’ Toledo hot briquetted iron facility, to complement its existing long-term minimum volume pellet offtake agreements with other key integrated steel producers. Further, the potential startup of pig iron manufacturing at AK Steel’s facility in Ashland, Kentucky would create future opportunities for pellet demand and more metallics products without significant additional capital expenditures.
• The combination is expected to generate approximately $120 million of annual cost synergies to be fully realized within the first 12 months after closing, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies.
• The combined company is expected to benefit from a larger and more diversified base of customers, with less overall emphasis on commodity-linked contracts.
The transaction is expected to close in the first half of 2020, subject to approval by the shareholders of both companies, receipt of regulatory approvals and satisfaction of other customary closing conditions.