On June 13, West Virginia-headquartered steel services company Esmark introduced a defence measure commonly known as a poison pill. Esmark now has the right to issue more shares to existing shareholders if a hostile acquirer buys more than 15% of EsmarkÆs outstanding shares and therefore dilute the holding of the hostile acquirer.
ôWe believe the adoption of the stockholders rights agreement will level the playing field among bidders and help maximise shareholder value as we move forward with the current process to sell the Company,ö says James P. Bouchard, chairman and CEO of Esmark, in a filing with the US Securities and Exchange Commission related to the move.
A day earlier, on June 12, Esmark's board of directors rejected an unsolicited offer by Russian steel major OAO Severstal. Severstal offered $17.00 per share to take over Esmark, representing a total equity value of $670 million, which Esmark deemed inadequate since Essar had already offered a higher price of $750 million. Other reasons cited by Esmark were:
- Severstal has not provided Esmark with terms of proposed arrangements to refinance EsmarkÆs debt facilities which are coming due and which may be accelerated due to the change of control;
- Severstal has not agreed to pay the termination fee of $20.5 million and another $2 million reimbursement of expenses due to Essar if the takeover agreed with Essar does not proceed;
- SeverstalÆs offer is highly conditional; and
- Essar has committed to spend $525 million in capital investments, while Severstal has only committed to make a $250 million investment.
Esmark is recommending EssarÆs improved offer for Esmark made on June 11. Essar upped its offer by $2 per share to $19, representing an equity value of $750 million and making it clearly superior in monetary terms to the offer by Severstal. The latter had matched EssarÆs original offer of $17 per share.
Also on June 11, Esmark subsidiary Wheeling-Pittsburgh Steel filed a case against the United Steelworkers Union alleging violations of federal labour laws in connection with the unionÆs attempts to block Essar's proposed acquisition of Esmark. Esmark president Craig Bouchard said that the union "seeks to turn what was intended as a shield of employee protection into a sword to veto business transactions that lie within the proper province of the board of directors and shareholdersö.
Before that, Essar had urged Esmark's board, in a letter dated June 10, to create a level playing field among bidders and thus allow shareholders to get the best price for their shares.
The background to the current situation is EssarÆs April 30 agreement to acquire Esmark for a cash purchase price of $17 per share, or a total equity value of $670 million. Essar also extended a $110 million loan to Esmark, which matures in June 2009, to address a potential default situation. Essar indicated its willingness to recognise the United Steelworkers, assume the basic labour agreement and negotiate a new agreement as soon as possible and also proposed a capital expenditure programme.
At the time of its original offer Essar had indicated it was valuing Esmark, including debt, at $1.1 billion. Essar has stood by this commitment to assume the debt and other liabilities. It is now valuing Esmark at a firm value of $1.18 billion.
But in mid-May the Esmark union rejected Esmark's decision to be acquired by Essar Steel, saying Essar will have to agree to a new labour agreement with the union before it will extend its support to the bid. Under an existing agreement with Esmark, the union has the right to come up with an alternative deal in the event of a takeover proposal for the company.
And shortly thereafter Russian steel major Severstal matched EssarÆs offer of $17 per share and came to the table with the backing of the union. At the time of its bid Severstal said it had "a highly credible restructuring plan designed to derive maximum value from Esmark, including a five-year capital improvement plan that carries the full support of the (union)".
Around 94% of EsmarkÆs shares are held by 69 institutions. What is complicating the current bidding war is the stance of EsmarkÆs largest institutional shareholder, Franklin Resources, who owns 60% of Esmark. Franklin Resources is a global investment firm commonly referred to as Franklin Templeton Investments.
Franklin said in an SEC filing before Essar tabled its latest bid that as EsmarkÆs majority stockholder it supports the sale of the company to Severstal as Severstal ôenjoys union backing and has already satisfied the conditions imposed by the companyÆs CBA (collective bargaining agreement)ö.
In 2007 Essar acquired Canada's Algoma Steel in a deal in which it was represented by UBS. UBS now sits across the table from Essar as adviser to Esmark. On the Esmark deal, Essar is advised by JPMorgan. Severstal is advised by Merrill Lynch and Citi.
Nasdaq-listed Essar closed at $19.99 on Friday, down 1.58%.
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