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Algoma bats its eyes
Monday, February 27, 2006
TORONTO Algoma Steel Inc. says the recent $5.6-billion sale of Dofasco Inc. has sparked renewed interest in takeovers of North American steel makers — including Algoma.
On Monday, Canada's third-largest steel maker mailed out a proxy circular to its shareholders, asking them not to toss out its independent directors at a future meeting.
And the Sault Ste. Marie, Ont.-based firm, which is caught in a battle with its largest shareholder, suggested that Algoma could still be gobbled up as the steel sector consolidates.
“Developments in the fourth quarter of 2005 and the first quarter of 2006 with respect to Dofasco Inc. have generated renewed interest in possible strategic activity involving North American steel companies, including Algoma,” the company stated in its circular.
It added that it has recently held discussions with “selective third parties” and opened up its financial books and steel operations to allow some of those parties to perform due diligence.
There is no assurance any deal will be consummated, the company cautioned.
Algoma put itself up for sale last May, but stepped off the auction block in August without a buyer.
Now it's defending itself against a New York hedge fund, Paulson & Co. Inc., that wants it to make a cash payout of more than $400-million to its stockholders.
Paulson, which holds a 19-per-cent stake in Algoma, has forced the steel maker to call a meeting for March 22, where all shareholders will be asked whether they want to elect a new slate of independent directors.
Those directors would then be asked to consider Paulson's cash payout plan, which Algoma's current board fiercely rejected.
Algoma scheduled the meeting for March so it would have time to get an advance ruling from the Canada Revenue Agency on the tax consequences of Paulson's plan.
In its circular, Algoma said it has been told by the CRA that a favourable tax ruling won't be issued. “In effect, the CRA has determined that the Paulson proposal does not work from a tax perspective,” the company said.
Algoma, which has fallen into bankruptcy-court protection twice in the past 15 years, issued a special dividend of $6 a share in August to distribute some of its large cash pot.
It says it will make more distributions when it can, and calls Paulson's proposal “risky and imprudent at this time.”
Algoma noted its business is capital-intensive. It will have to spend about $125 relining a blast furnace in 2010 and it has a $287-million pension deficit that requires “significant” yearly payments.
Steel markets are uncertain, it added.
“If the Paulson proposal was implemented, the result will be the unravelling of four years of progress at Algoma, leaving Algoma weaker in the face of a volatile and uncertain steel industry,” it said.
“The Paulson proposal would reverse Algoma's momentum...It would limit Algoma's strategic options and leave the corporation vulnerable. It would remove a board with a proven record of delivering value, could result in the loss of senior management and leave all stakeholders facing an uncertain future or, worse, a return to the troubled past.”
On Tuesday, Algoma's union, the United Steelworkers, will ask an Ontario Superior Court judge in Sault Ste. Marie to stop the March meeting.
In new court documents, Paulson says “a continued paralysis of Algoma may well be catastrophic for Algoma and its shareholders.”
“The right of shareholders to remove directors is a fundamental right guaranteed by statute,” Paulson says. “Any director may be removed from office by a simple majority vote of shareholders.”
Paulson notes that it is not trying to remove the three Algoma directors who were nominated by the United Steelworkers union.
When Algoma emerged from bankruptcy protection in 1992, the union had the right to elect five of the 13 directors. When the new board filed for bankruptcy protection again in 2001, the union's influence was diminished, Paulson says.
Under its 2004 contract, the Steelworkers can still nominate three directors.
Paulson's nominees include Trevor Eyton, a Canadian senator and director of Brookfield Asset Management, the former Brascan conglomerate. In its circular, Algoma noted his interests could differ from Algoma's shareholders because Brookfield is about to become rival Stelco Inc.'s largest shareholder.
Another nominee is Nicholas Tolerico, former president of ThyssenKrupp Steel Services, which Algoma notes is a potential buyer for Dofasco.
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