Carl Icahn’s offer to purchase Commercial Metals Co. at the lowest valuation for a steel takeover since 2007 is leaving the door open for rival bidders to snap up a recycling bargain.
The billionaire investor’s $2.6 billion proposal for the 90 percent he doesn’t already own values the steel-scrap recycler and distributor at a 67 percent discount to its estimated 2012 sales, making it the second-cheapest steel deal on record, according to data compiled by Bloomberg that includes net debt. While the 18 percent premium to Commercial Metals’ 20-day trading average is in line with past takeovers in the industry, the $15-a-share bid is less than the $15.83 that analysts estimate the company will reach on its own in the next year.
With Icahn planning to combine the Irving, Texas-based recycler with his existing metals operations, the bid may be low enough to entice Nucor Corp., the biggest U.S. steelmaker by market value, to make an offer to add more plants and cut costs, according to CRT Capital Group LLC. While Commercial Metals had lost 71 percent of its value since June 2008 after a global recession depressed demand for steel used in construction, the company that melts scrap into reinforcing steel bars for buildings is projected to return to profitability in 2012.
“I look at 15 bucks as a starting point,” Kuni Chen, an analyst for CRT Capital in Stamford, Connecticut, said in a telephone interview. The offer “could be enticing to some shareholders who have been frustrated, but there’s potential to go higher than that, whether it’s from Icahn or someone else. Nucor is the one that would come to mind,” he said.
Susan Gordon, a spokeswoman for Icahn, didn’t respond to an e-mail requesting comment. Chris Kittredge, an outside spokesman for Commercial Metals, declined to comment. Katherine Miller, a spokeswoman for Charlotte, North Carolina-based Nucor, didn’t respond to a phone call or e-mail seeking comment.
Commercial Metals fell 1 cent to $13.98 today. Nucor rose 7.1 percent to $39.43, the biggest gain since May 2009.
Icahn, 75, disclosed in July that he bought an almost 10 percent stake in Commercial Metals and may seek conversations with management. That prompted the company to adopt a so-called poison pill to cap investors at 10 percent and prevent hostile takeover attempts.
This week Icahn Enterprises LP offered to acquire the 90 percent of shares that it didn’t already own for $1.56 billion plus $1.01 billion in net debt without any financing or due diligence conditions, according to a Nov. 28 letter. Icahn said he will sell “non-core” assets, appoint a new management team and combine the company with its North American scrap metal processor PSC Metals Inc.
“Unfortunately, a below average operating performance fueled by a distracting and misguided international growth plan, combined with a disastrous investment record, has become the defining characteristic of Commercial Metals,” Icahn said in the letter. “Because the company has been so poorly managed, shareholders are exposed not only to cyclical industry risks, but also to permanent risks.”
Before Icahn’s proposal was disclosed, Commercial Metals’ shares were down 71 percent from their peak of $39.41 in June 2008. The decline wiped out $3.2 billion in market value as slumping economic growth in the U.S. and Europe hampered sales of steel used in everything from cars to construction.
About 50 percent of its U.S. sales are from non-residential construction, which is “pretty depressed,” according to Arun Viswanathan, an analyst with Susquehanna International Group LLP in New York. The company has posted two straight annual losses and earlier this month had its investment grade credit ratings cut to junk by Standard & Poor’s and Moody’s Investors Service.
“Because of the slowdown in the U.S. manufacturing economy, there’s less prime scrap available for these guys so you saw them really hit with higher scrap costs and low demand,” Ken Hoffman, a steel analyst for Bloomberg Industries, said in a phone interview from Skillman, New Jersey. Residential and commercial construction “obviously has been massively hit over the past three or four years,” he said.
With analysts estimating sales will climb 5.7 percent to $8.37 billion in the year ending August 2012, the proposal values Commercial Metals at 0.33 times revenue. That’s the cheapest revenue multiple for a takeover of a steel producer greater than $500 million since buyout firm Platinum Equity LLC paid 0.31 times revenue for Ryerson Inc. in 2007, data compiled by Bloomberg show.
‘Swinging and Fighting’
Commercial Metals said in a statement that its board will review Icahn’s letter. The company, which said it has improved financial results and cut costs including jobs, also plans to close or sell a mill in Croatia and shut five rebar-fabrication plants.
Commercial Metals is projected to return to profit in 2012 with analysts forecasting net income of $158 million, data compiled by Bloomberg show. Analysts also estimate the shares to climb to $15.83 within the next 12 months as a standalone company, 5.5 percent higher than the current offer.
Even as the shares dropped to a three-year low in October, Commercial Metals has averaged $14.19 this year through Nov. 25. That means Icahn’s $15-a-share bid is only a 5.7 percent premium to the stock’s 2011 average.
“The board is probably going to come out swinging and fighting,” Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM Partners, said in a telephone interview. “It’s very likely that they will reject it, say it’s inadequate and say now’s not the time to sell the company. The question is whether you believe those forward earnings or not.”
Nucor as Bidder
The bid from Icahn, who never pays “top dollar,” is low enough that it leaves room for other potential bidders to step in with a higher price, he said.
Nucor, which had a market value of $11.7 billion as of yesterday, may be interested in acquiring Commercial Metals because of potential cost cuts from overlapping products and mill locations, CRT Capital’s Chen said. Commercial Metals may be worth as much as $25 a share, based on a sum-of-the-parts valuation, he said.
While Nucor may be the most “logical” buyer, a combination may face antitrust scrutiny because it would give them more than 60 percent of the North American rebar market, said Viswanathan of Susquehanna. A rebar is a steel bar used to reinforce building structures.
Icahn’s Track Record
Instead, ArcelorMittal, the world’s largest steelmaker, or Cherepovets, Russia-based OAO Severstal, may be interested in buying Commercial Metals to shut down some production capacity, which is outstripping demand in North America, Viswanathan said. An e-mail sent outside normal business hours to Luxembourg-based ArcelorMittal’s press office wasn’t immediately returned. Andrew Hayes, a spokesman for Severstal, said the company doesn’t comment on market speculation.
Commercial Metals closed yesterday at $13.99, 6.7 percent below Icahn’s proposal, indicating many traders who wager on acquisitions aren’t confident the proposal will lead to a deal or that another bidder will emerge. Investors may be hesitant because of Icahn’s recent track record, according to Louis Meyer, a special situations analyst for Oscar Gruss & Son Inc.
Icahn, who made millions in the 1980s pressuring companies from USX Corp. to Texaco Inc. to split up or increase dividends and buybacks, failed in advocating for a takeover of Clorox Co. this year, even after offering to backstop an auction. Power producer Dynegy Inc., film maker Lions Gate Entertainment Corp. and software maker Mentor Graphics Corp. also received acquisition offers from Icahn that were never consummated.
‘It’s Carl Icahn’
“The stock’s trading at a discount because it’s Carl Icahn,” New York-based Meyer said in a telephone interview. “We’ve been through the drill before and we’ve seen some successes and we’ve also seen some failures.”
While it’s still unclear if another bidder will step in, Icahn’s activism will probably instigate a sale of Commercial Metals, said MKM’s Moore.
“As to whether he’ll ultimately buy it, it’s more likely that he’d buy this one than several of the last few that he’s looked at,” Moore said. “I still think his primary objective would be to tee this thing up and hopefully have the company run out and find another buyer.”