United States Steel Corporation X has agreed to acquire a 49.9% ownership stake in Arkansas-based Big River Steel for roughly $700 million in cash with a call option to purchase the remaining 50.1% within four years. The option gives U. S. Steel the right to purchase the remaining equity at an agreed-upon price formula based on Big River’s achievement of specific metrics.
The implied enterprise value of the transaction is roughly $2.32 billion including Big River’s recently announced fully-funded Phase II-A expansion that is expected to double the plant’s hot-rolled steel production capacity to 3.3 million tons annually. The expansion will boost Big River’s ability to make higher grades of electrical steel and establish it as one of the largest EAF-based flat-rolled mills in North America.
U. S. Steel said that it has committed financing to execute the deal and plans to increase its current $1.5 billion asset-backed lending facility to $2 billion. It also intends to draw on the upsized asset-backed lending facility, which has been fully committed by Barclays Capital, to finance the transaction. The transaction, which is subject to customary closing conditions, is expected to consummate on Oct 31, 2019.
Big River's Flex Mill in northeast Arkansas is the world's only LEED-certified steel mill. It is the newest and most technologically advanced flat-rolled mill in North America. Big River invested $1.3 billion to build the Flex Mill that focuses on making a wide range of products including advanced automotive steels and electrical steels.
U.S. Steel noted that the investment in Big River will bolster its competitive position in highly strategic steel-end markets and establish an unmatched product platform in high-margin end-markets including energy, infrastructure and automotive. It will also strengthen the company’s Flat-Rolled segment’s position to cater growing U.S. and Mexican markets. Notably, the deal positions the company to attain as much as $1 billion in capital and operational cash improvements by 2022.
The investment also complements U. S. Steel’s earlier announced investments in advanced high-strength steel in Ohio, electric arc furnace in Alabama, electrical steel line in Slovakia and best of breed endless casting and rolling technology in Pennsylvania. U.S. Steel said that the investment is the first step towards acquiring Big River.
Shares of U.S. Steel, which currently carries a Zacks Rank #4 (Sell), has lost 40% year to date, underperforming the industry’s 16.8% decline.
U.S. Steel issued underwhelming guidance for the third quarter last month. It expects to record adjusted loss per share of roughly 35 cents for the quarter. The company expects lower steel prices and higher-than-expected decline in scrap prices to hurt its Flat-Rolled segment through the second half of 2019. The company will continue to idle its two U.S. blast furnaces at least through the end of 2019.
The company also noted that market conditions have continued to weaken in Europe. Factoring in prevailing market conditions and sustained high level of steel imports into Europe, U.S. Steel does not expect to restart the currently idled blast furnace in 2019.
Moreover, U.S. Steel expects its Tubular segment to remain under pressure through the balance of 2019 due to high import levels and unfavorable market conditions. The company also expects lower selling prices for seamless and welded pipe to hurt earnings of the division in the second half of the year.
United States Steel Corporation Price and Consensus
United States Steel Corporation price-consensus-chart | United States Steel Corporation Quote
Stocks to Consider
Better-ranked stocks worth a look in the basic materials space include Arconic Inc ARNC, Kinross Gold Corporation KGC and Alamos Gold Inc. AGI, all sporting a Zacks Rank #1 (Strong Buy).
Arconic has an estimated earnings growth rate of 50% for the current year. Its shares have moved up 9% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kinross has projected earnings growth rate of 170% for the current year. The company’s shares have surged around 76% in a year’s time.
Alamos Gold has estimated earnings growth rate of 340% for the current year. The company’s shares have rallied roughly 25% in a year’s time.
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