Steel Industry Insight

A (not so) trivial pursuit

Merger and acquisition activity is rarely very exciting—larger companies snapping up smaller companies or competitors to expand their reach or negotiations between two companies during times of financial trouble is nothing new, especially in the steel industry. Seldom does an acquisition grab the headlines of major global news outlets such as CNN and Bloomberg Businessweek, among others, but that’s exactly what happened in the latter half of last year, when billionaire investor and Wall Street legend Carl Icahn began rapidly acquiring shares of Irving, Texas-based steelmaker, fabricator and metals recycler Commercial Metals Company (CMC). Icahn was able to acquire nearly 10 percent of the company’s shares before CMC adopted a stockholder rights plan that would prevent any one person from acquiring more than a 10 percent stock in the steelmaker, following “Carl Icahn’s sudden and rapid ownership increase in CMC, his aggressive use of derivatives which obscures the rate of his increase, and a call to the Company from one of Mr. Icahn’s representatives who indicated Mr. Icahn’s intention to continue accumulating CMC stock,” according to a news release from CMC. By October Icahn had indicated his intention to nominate three new directors to CMC’s Board and make other “proposals.”

Later, Icahn made his intentions clear regarding CMC when he issued an open letter to the press directed at the Board of Directors on November 28, 2011 announcing that the Carl Icahn-controlled Icahn Enterprises LP (IEP) offered to acquire Commercial Metals Company at $15 per share without any financing or due diligence conditions. He noted that the offer price represented a premium of 31 percent over the stock’s closing price on November 25, 2011, which was $11.45, and a premium of 72.6 percent from its yearly low on October 3, 2011, which was $8.60. Icahn insisted that such a takeover was in the best interest of the shareholders. “When the acquisition is completed,” Icahn said, “IEP intends to combine Commercial Metals with IEP’s own metals recycling assets. IEP will sell Commercial Metals’ non-core assets and immediately appoint a new management team to run the steel business.”

Icahn took jabs at CMC’s management throughout the letter: “Those who desire to stay invested in this industry could take their proceeds and invest in direct competitors in the steel industry which we believe are much better managed and better situated to take advantage of any possible economic recovery than Commercial Metals,” he wrote.

Icahn added that IEP did “not believe the current Board is capable or willing to undertake the actions necessary to enable Commercial Metals to compete in the future…The track record established by the current Board and management team over the last several years is dismal. Unfortunately, a below average operating performance fueled by a distracting and misguided international growth plan, combined with a disastrous investment record, has become the defining characteristic of Commercial Metals.”

“Despite this dismal record, the Board recently granted bonuses to management, including a $750,000 bonus to the new CEO—for what exactly?!” Icahn said, clearly infuriated.

CMC has struggled with profitability for some time, suffering losses throughout 2010 and 2011. During CMC’s fiscal Q4 2011, the company incurred a $120.3 million net loss, mostly stemming from costs related to divesting its Sisak mill in Croatia and closing five rebar fabrication facilities, including four domestic and one international location, as well as eight construction services (CRP) locations. CMC reported a $46.2 million net loss in the third quarter as well, and for the full fiscal 2011 year, which ended on August 31, 2011, CMC suffered a $129.6 million net loss.

Regardless, CMC quickly responded that it would review Icahn’s “unsolicited letter” and determine the best decision for the Company and its stockholders; but because the letter did not constitute a formal offer, shareholders did not need to take any action. CMC’s response also included recent positive changes the company has made. “In a highly cyclical industry, [CMC] continues to make significant progress on many key fronts to enhance performance and position Commercial Metals Company for future success, showing improved financial results in fiscal 2011.”

But Icahn quickly repudiated CMC’s claim, writing that CMC’s indication that the offer was not a “formal” one is “absurd and in-keeping with the confused decisions and statements that this management team and Board have made over the past three to four years. We have no idea why the Board would want to misconstrue what was obviously a formal offer.”

“We do not want any confusion or misinformation,” continued Icahn. “So let’s reiterate what should have already been clear. The offer we delivered to the Board earlier today is, in all respects and without any doubt, a formal all cash offer to acquire the Company. In fact, we will repeat our offer in order to eliminate the Board’s confusion. Here it is again…” And Icahn restated the IEP offered to purchase CMC for $15 per share.

However, neither party made any further statements over the following days until December 2, when Icahn released another public letter, indicating that IEP had not received any word from CMC regarding the offer but since the announcement a few days earlier, 22 million CMC shares were traded (19 percent of the company’s outstanding shares), and “allowing shareholders to trade such heavy volumes without responding to our offer is completely irresponsible—but wholly consistent with the pattern of irresponsibility demonstrated by the Company over the years.” If CMC did not respond by 9 a.m. EST on December 5, Icahn said, IEP would “take matters into its own hands.”

CMC unanimously rejected Icahn’s proposal on December 5, calling it “unsolicited” and “opportunistic.” CMC’s Lead Director Anthony Massaro and President and CEO Joe Alvarado said that Icahn’s “premium” takeover offer isn’t really a premium, undervalues the company and is not in the best interest of CMC stockholders. “The CMC Board believes that Mr. Icahn’s proposal substantially undervalues the Company and is an opportunistic attempt—at a time when we are at a low point in the economic and industry cycle—to transfer the future value of CMC from its stockholders to Carl Icahn,” said Massaro. “It’s important that our stockholders understand that Mr. Icahn is making an aggressive push to acquire the Company at this time in an attempt to achieve a bargain basement price for CMC.”

But Icahn didn’t back down, quickly responding the next day that because CMC rejected his offer, IEP plans to ask shareholders directly to support his takeover bid. The offer requires 40.1 percent of shareholders to sell their stakes to Icahn to succeed—when combined with Icahn’s approximately 10 percent stake, would give Icahn a majority of the shares. Icahn added that if he is able to gain a majority, the CMC Board will not be able to stand in the way of a takeover, but in case they do, he will fight the company “all the way to the Delaware Supreme Court.”

This isn’t the first time Icahn has focused his attention directly at shareholders when attempting to acquire a company. For the last 30 years, Icahn has purchased stakes in many multi-million dollar corporations he believes to be under poor management. His tactics have even coined the Wall Street catchphrase “the Icahn lift”—representing the “lift” share prices experience once Icahn begins buying stakes in companies and/or begins a hostile takeover, quickly making him a multi-billionaire.

Since 1978, Icahn has taken positions in some of the world’s largest corporations: RJR Nabisco, Texaco, Phillips Petroleum, Western Union, Gulf & Western, Viacom, American Can, USX, Marvel, ImClone, Federal-Mogul, Kerr-McGee, MedImmune, BEA Systems and Time Warner. Icahn also owns a 9.4 percent interest in Clorox Company and even offered to purchase the company outright as he did with CMC.

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