SSAB, a Swedish steelmaker, offered to buy Finnish rival Rautaruukki Oyj for 10.1 billion kronor ($1.56 billion) to cut costs and improve competitiveness. Shares in both companies surged.
SSAB sees annual cost savings of 1.4 billion kronor within three years of completing the merger, the Stockholm-based company said in a statement today. The combined company, which will be based in the Swedish capital, would have had sales of about 63 billion kronor in 2012, SSAB said.
“Similar strategies of focusing on specialty steels complement each other,” Pohjola Bank Oyj said in an note to clients. “It would also bring economies of scale to basic products.”
Falling steel use by the automotive and construction industries and rising Asian competition are weighing on prices as European steelmakers struggle with too many furnaces. ThyssenKrupp AG and Outokumpu Oyj have reported annual losses for several years and are planning to cut thousands of jobs.
Rautaruukki shares rose as much as 34 percent in Helsinki, the most on record, trading up 31 percent at 9.01 euros at 10:38 a.m. local time. SSAB gained as much as 14 percent to 46.65 kronor, the most since 2008.
SSAB had a net loss of 801 million kronor in the first nine months of last year, compared with a profit of 242 million kronor in the same period a year earlier. Its sales fell 15 percent to 26.1 billion kronor.
The transaction will “only slightly” strain SSAB’s balance sheet and it should be beneficial over the next few years, if the combined companies are able to realize the expected cost savings, Citigroup Inc. said in a note to clients.
Rautaruukki reported a profit for the first time in nine consecutive quarters on Oct. 23, as cost reductions helped cope with lackluster European demand. The companies said they will need to cut about 5 percent of the combined 17,400 jobs over three years.
“We consider the merger as strategically logical,” Antti Viljakainen, an analyst at Inderes Oy, said in a note to clients. Even so, “both companies have struggled with profitability and we don’t believe that the merger will significantly remedy the steel industry’s overcapacity problem and the resulting weak pricing power.”
SSAB will offer Rautaruukki shareholders 0.4752 new Class A shares and 1.2131 new Class B shares for every share they hold in the Finnish company. The offer represents a premium for Rautaruukki shareholders of 20 percent, based on the closing prices of the companies on Jan. 21. Rautaruukki’s board unanimously recommended shareholders accept the offer. The Finnish company’s owners will hold 25 percent of votes and 42 percent of capital in the new company.
The new company will be led by SSAB Chief Executive Officer Martin Lindqvist while Rautaruukki CEO Sakari Tamminen will retire after the deal is completed, following SSAB’s shareholder meeting planned for April 9. The company will be based in Stockholm and will apply for secondary listing in Helsinki. SSAB and Rautaruukki plan to propose no dividends for 2013.
Solidium Oy, the Finnish state’s equity-investment manager holding 39.7 percent of the shares of Rautaruukki, and Industrivaerden AB, which owns 18.2 percent of the stock in SSAB, both support the planned merger. The deal also has preliminary backing from Finnish pension funds Ilmarinen and Varma, which have a combined 5.5 percent stake in Rautaruukki.
“There is particularly strong strategic and financial reasoning for the transaction,” Kari Jaervinen, managing director of Solidium, said in a statement. “Small producers, such as Rautaruukki and SSAB, can be competitive by focusing their production into high-quality steel products.”