Essar Steel Algoma Files Motion for Sale of Company

• Amendments to the Port of Algoma and cogeneration plant agreements
• Securing long-term iron ore contracts and coal supply contracts
• Agreement regarding a reduction in property tax assessments from City of Sault Ste. Marie
• Continued participation in the Northern Industrial Electricity Rate program
• Establishment of financial and other support including capital projects and employee training programs granted by Governmental 
• Approval of regulations that relieve the buyer of all Pension Plan obligations except for specified fixed and variable amounts
• Replacement of the collective agreements with new collective agreements ratified by the membership and effective upon closing
• Agreements with applicable governmental authorities exempting KPS from any pre-closing environmental liabilities

The motion filed is several hundred pages long and contains specific details on the SISP process, the purchase agreement and other information relevant to the purchase agreement.

In the affidavit of John Strek, Senior Managing Director of CDG Group, LLC and Court-appointed Chief Restructuring Advisor for Essar Steel Algoma, he notes that this is the fourth court supervised restructuring of Algoma.

In the motion Strek said, “The Applicants have continued to operate in the ordinary course during their CCAA proceedings, but are still facing operational challenges (such as recently experienced temporary disruptions with Algoma’s blast furnace due to issues with input raw material, which negatively impacted the steel production and shipments), a difficult environment to grow sales due to being under the CCAA proceeding and the need to fund the next inventory build. While steel prices have recently risen, there is no certainty regarding the future price of steel.”

“A restructuring alternative must provide for a timely exit from the CCAA proceeding and a plan sponsor willing to support Algoma with a cash equity investment and a capital structure that will sustain the Business during the cycles of steel pricing.”

Strek said KPS meets the requirement. “KPS will be a capable manager of the Business. KPS is well-financed, has a track record of acquiring and turning around distressed businesses, has experience in the metals industry, and has a successful history of working constructively with unions which are a key stakeholder in any steel company.”

A closing of the transaction is anticipated by August 31. “The Sale Transaction should allow the Applicants to complete their restructuring by September 2016, which is the ideal time to do so given the nature of the Business. Concluding the Sale Transaction prior to autumn will stabilize and de-leverage the Applicants’ Business prior to the inventory build-up. Failure to successfully stock pile inventory prior to winter would have a materially adverse effect on the Business.”

Union response

USW Local 2251 has been dissatisfied with the SISP procedures. Despite declarations to the contrary by Strek, Local 2251 says it has not been consulted in any material way. “Being informed of a decision is not being involved in the making of the decision,” said Local 2251 president Mike Da Prat in a message to union members.

“It has been suggested by the Company that they expect the USW will be in support of the offer. Local Union 2251 was NOT involved in the selection of KPS as a bidder. Local Union 2251 was NOT involved in the selection of KPS as a successful bidder. The Company does not have the right to expect anything of the Local Union except that the Local Union will act in the best interest of its members.”

KPS co-founder and managing partner Michael Psaros said, “We want to have a constructive and successful bargaining process, professionally and expeditiously.” KPS has met with the salaried union Local 2724 but not yet with Local 2251. KPS says it plans to offer employees the same wages they are currently used to.

A likely contention point will be the issue of pensions. KPS will not assume responsibility for the current defined benefit pension and retiree health plans. It plans to fund pension/retiree health benefits though annual fixed and variable cash payments to trusts created for that purpose.

Possible merger with US Steel Canada

In an interview with the Globe and Mail, Psaros said, “I can confirm it is our intention to acquire each of Algoma and Stelco [US Steel Canada] and merge them.”

Psaros said, “There are offensive mergers and defensive mergers. In defensive mergers you get two companies together and you shut stuff down. This is an offensive merger.” He indicated that the two companies would continue to run with nothing shut down.

US Steel’s SISP process is nearing completion with KPS Capital, Essar Group and Bedrock Industries reported to be the final contenders. KPS and Essar are the strategic favorites for a successful bid. Essar was barred from the Algoma sale for not providing proof of sufficient financial resources to complete a purchase.

A merger of the Algoma and USSC would result in an estimated annual steelmaking capacity of 5 million tons.