Strategy

Steel: Stranger Than Fiction

All it cost Stelco Inc. To achieve its latest tentative restructuring deal was a little time and a lot of pizza.

All it cost Stelco Inc. to achieve its latest tentative restructuring deal was a little more time and a lot of 'za.

For those of you who can't recall, the Hamilton-based steelmaker started making embarrassing amounts of money shortly after claiming to be insolvent in January 2004. Fixing a profitable company has proven difficult, which is why the long-awaited vote on Stelco's future was put on hold for what felt like the millionth time on Nov. 23.

Sitting in what has been dubbed the Love Boat room (think lots of tiny lights) of a convention centre/bingo hall/furniture mart near Toronto's airport, ma an pa creditors were left wondering what happened to the court-issued “real and functional” deadline. Food was demanded. Pizza Pizza was called. And despite dealing with a self- proclaimed credit risk, the fast-food chain showed Stelco how to deliver on time.

As the small group of frustrated small fry feasted on pizza slices and placed bets on future delays, a coalition of powerful bondholders was on the phone slicing up the company's previous offer of 66¢ on the dollar. All that cost taxpayers was another $80 million, bringing total federal and provincial contributions to this fiasco to $180 million.

Stelco managed to sweetened the deal for senior creditors, including U.S. hedge funds that could now make money on the saga. Workers were brought onside by an earlier promise to dump $400 million into pension plans, not to mention a raise for employees at Stelco's Lake Erie Works. But believe it or not, recent moves by industry giants to establish a Canadian foothold have had no material impact on this restructuring, meaning Stelco still claims it isn't worth enough to offer shareholders anything at all.

Courtney Pratt, Stelco's CEO, told Canadian Business he knows of no renewed outside interest in Stelco. But critics point to the previously unimaginable bids for Stelco's hometown rival. In November, Germany's ThyssenKrupp AG sent Dofasco Inc. shares soaring with a friendly $61.50-per-share run at the company. The $4.8-billion offer topped a hostile bid by Luxembourg-based Arcelor SA, which offered $56 a share when Dofasco traded in the low $40s.

Industry watchers say Dofasco could attract even higher bids (despite a controversial $100-million break fee attached to the ThyssenKrupp offer) because it is one of the best-run players in the global steel market, plus it has its own iron ore business that mitigates the cost of resources.

Stelco isn't Dofasco. It has higher legacy costs and one of the worst labour relationships in Canada. But the embattled steelmaker attracted numerous bids last year. Like Dofasco, Stelco offers offshore giants access to the North American automotive market. And its assets also include iron ore.

(At Algoma Steel, where directors have been accused of missing market opportunities to boost shareholder value, the keen interest in Dofasco is also being highlighted by shareholder activists.)

Non-monetary issues could further delay Stelco's creditors' vote, which is now slated for December. Mid-level creditors are also now actively seeking a better deal. Meanwhile, talk of lawsuits aimed at Stelco's board of directors is escalating. “Where the hell is the OSC?” asks one angry investor, who can't understand how a company can legitimately aim to wipe out shareholders while giving workers a raise. “This is worse than insider trading. It's theft.”