Mumbai: The Ruias-promoted Essar Steel Holdings Ltd’s $1.1 billion (Rs4,690 crore) offer for US-based steel maker Esmark Inc. has run into another roadblock, with the United Steelworkers (USW), a representative union of steel workers in the US and Canada, vowing to block the deal.
USW sent a letter to Esmark on Friday (late night in India) demanding the company scrap its agreement with Essar, claiming the deal violates the union’s contract with Esmark.
“The USW’s rights under the right to bid clause clearly prohibit the company from entering into these agreements and we will take whatever action is necessary to protect these rights,” said David McCall, a USW director, in the letter.
The deal is about a fortnight into the 52-day “right to bid” period required under the collective bargaining agreement with USW, which has the right to reject any deal that changes control of the twice-bankrupt Wheeling-Pitt, the steel maker that Esmark initially seized control of in a proxy fight in the fall of 2006.
Under another section of the USW labour agreement—the Successorship Clause—the two companies cannot close the proposed transaction until Essar enters into a collective bargaining agreement with USW.
The labour group has told Esmark it will use that power to block the Essar deal, the letter added.
Phone calls to USW for further comments went unanswered over the weekend.
“I do not think it is a real threat to the deal. The union is just trying to get some leverage out of the whole exercise,” said a banker who has been involved in many cross-border deals in the US, including in steel and aviation.
“There has been a long history of deals in the steel industry in the US to which the USW has voted ‘yes’. I really cannot think of any deals where they have said no,” the banker added. He did not want to be identified due to company policy.
However, he also said USW is a strong body and Essar would definitely have to negotiate with the union before closing the deal.
An Esmark spokesperson from West Virginia, US, said, “We have received the letter from the USW and we will respond to it within the next couple of days. We have not held anything back from Essar, and we have not heard from Essar about this (USW letter) as of now.”
“We are in continuous discussions with Essar and the deal is on track as far as Esmark is concerned,” the spokesperson added.
Esmark’s spokesperson did not address USW’s allegation that Esmark breached legal protections granted in the right to bid clause by entering into the deal without providing appropriate notice to the workers and an opportunity to bring forward an alternative proposal.
The union has also indicated in its letter that it believes Essar was complicit in this breach.
“It is quite frankly offensive that after the support Esmark received from the Steelworkers to get control of the company in the first place, that they would simply ignore the agreement they made with us,” Leo Gerard, USW president, commented in the letter to Esmark. “This will not be allowed.”
An Essar spokesperson, when contacted, offered no comment on the issue. The Indian firm on 1 May had agreed to buy Esmark for $670 million. The total value of the deal is about $1.1 billion, including $430 million in debt.
Esmark, in a regulatory filing, said it cannot settle any claim exceeding $500,000 without Essar’s consent, while the aggregate amount it could pay towards any claim or settlement is $2 million.
“Considering the recession in the US, it will be logical and better for a steel worker in the country to be working in a firm owned by an Asian. Essar will just have to convince them that if they are willing to compromise in the beginning, they will be much better off later,” the banker said.
If the merger fails, Esmark would have to cough up $20.5 million as termination fee and up to $2 million as reimbursement of “out-of-pocket expenses”.
Esmark has also been sued by global steel giant ArcelorMittal for more than $540 million in damages for an alleged breach of contract in buying ArcelorMittal’s Sparrows Point steel mill for $1.35 billion.
Esmark reported a net loss last year of $9 million, or $2.15 per share, compared with a net income of $3.5 million, or $9.71 per share in the previous year.