Mumbai: US-based steel maker Esmark Inc.’s largest and majority shareholder has urged the board of directors to sell the company to Russian firm OAO Severstal, rather than Essar Steel Holdings Ltd, following the vigorous opposition that Essar’s offer has faced from the United Steelworkers, a powerful union of steel workers in the US and Canada.
“It seems clearly the case that the USW’s opposition to the Essar transaction will be difficult, if not impossible, to overcome and it is our judgment that this inescapable element of the Essar proposal, both because of the delay it will involve under the best circumstances as well as the serious level of uncertainty it poses to the ultimate consummation of the deal, represents a very significant infirmity of the Essar transaction that could only be cured by obtaining USW support,” investment adviser firm Franklin Mutual Advisers Llc., said in the letter, according to a Thursday regulatory filing with United States Securities and Exchange Commission.
“Accordingly, we urge the board of directors and management to maximize value, to move expeditiously to conclude an agreement with Severstal and to bring this opportunity to Esmark’s stockholders,” wrote Peter Langerman, Franklin’s chief executive officer, in the letter to Esmark’s board. Franklin holds 60.4 % of Esmark’s total outstanding shares as on 31 March.
Essar agreed on 1 May to buy Esmark for $670 million (Rs2,894 crore), with the total value of the deal at about $1.1 billion, including $430 million in debt.
An Essar spokesperson in Mumbai declined to comment on the development. On Tuesday, Severstal matched the $17 a share offered by Essar for Esmark and also claimed the critical support of the USW, which has the power to veto any change in the management of Esmark under an existing labour agreement. On Thursday, the USW confirmed it strongly supports Severstal’s bid and reiterated its opposition to Essar Steel’s offer.
“Although the USW did have some discussions with Essar, they came very late in the process and those discussions did not result in an understanding regarding a Successor Labor Agreement. Despite knowing this, Esmark signed an agreement with Essar without providing the USW with the opportunity to put forward an alternative proposal under explicit provisions of the Right to Bid clause,” said David McCall, a USW director, in a statement issued Wednesday. “...Severstal has agreed to a contract that meets the needs of our members and our retirees.”
Meanwhile, in an email to Mint, McCall said the USW can still consider supporting Essar but, that will depend on the “plan” the Indian company is willing to put forward.
“What Essar can do from here is to convince the shareholders that their offer is better, and they can deliver better revenue synergies”, said a banker who has been involved in many cross-border deals in the US, including in steel and aviation, but isn’t advising anyone on this transaction. “But, it is looking difficult for Essar to complete the deal” According to Franklin Mutual, the Essar proposal is subject, at the least, to the expiration of USW’s lengthy “right to bid” period. The USW has a deal with Esmark, which expires on 1 September, in which the union has the right to veto any deal that changes management control.
Esmark shares, which continued to trade above the price offered by both Essar and Severstal, rose about 1% to close at $18.44 Thursday on the Nasdaq.