Esmark Repurchases Processing Plants From Severstal

May 20, 2010, Bloomberg Businessweek, By Edmond Lococo
(Updates with comment from analyst in fourth paragraph.)

Esmark Inc., which sold its steel assets to Russia’s OAO Severstal in 2008, repurchased three processing plants that were part of the earlier transaction as Severstal exits that business in the U.S.

Esmark acquired Sun Steel and Century Steel, both in Chicago Heights, Illinois, and Independent Steel, which is based in Cleveland, Thomas Modrowski, chief executive officer of closely held Esmark’s steel group, said today in an interview. The plants together employ about 200 and have an annual processing capacity of about 300,000 metric tons of flat-rolled steel. Financial terms weren’t disclosed.

Esmark two years ago sold all its steel assets, including the service centers and the Wheeling-Pittsburgh steel works, to Severstal in a transaction valued at about $775 million. Severstal earlier this week sold the other four steel-processing centers it acquired from Esmark to Aurora Capital Group, a Los Angeles-based private-equity fund.

“Severstal bought at the peak of cycle and paid much too much for these things,” Charles Bradford, a partner at New York-based consulting firm Affiliated Research Group LLC, said in an interview today. “Esmark is probably buying back these assets at a much lower price than the Russians paid.”

Bette Kovach, a spokeswoman for Severstal in the U.S., confirmed that the sale of assets to Esmark is complete. She also declined to disclose terms.

November Purchase

Following the expiration of a non-compete clause with Severstal in August 2009, Chicago-based Esmark re-entered the steel-processing business in November with the purchase of Amtex Steel Inc. for $10 million. Esmark said at that time it would have $250 million in annual steel revenue by the end of 2010. The repurchase of the centers from Severstal will more than achieve that objective, Modrowski said today.

“This gives us a very nice platform to continue to grow,” said Modrowski, 53. “We will continue to search out value plays in the Midwest because that is still the largest steel-consuming area in the country.”

As part of the purchase, Esmark also received intellectual property, brand names and trademarks for two steel-processing plants that aren’t currently functioning: Great Western Steel and North American Steel, which were both based in Illinois, Modrowski said.

Oil and Gas

Brothers James and Craig Bouchard started Esmark with an investment of $2.4 million in 2003 and ultimately built it into the fourth-largest U.S. steelmaker through nine acquisitions, prior to selling the entire business to Severstal. After exiting the steel business, Esmark continued to operate holdings in oil and gas exploration, aviation, real estate and sports management.

Severstal, based in Cherepovets, Russia, has spent about $4 billion since 2006 to acquire assets in other countries, according to Moody’s Investors Service. The company’s U.S. units reported a $97 million fourth-quarter loss before interest, taxes, depreciation and amortization, Severstal said in March.

The company is controlled by billionaire Alexei Mordashov, who has said the company plans to remain in the U.S. and focus investment on steelmaking mini-mills, including the expansion of a plant in Mississippi.

“Severstal North America will now dedicate all of its attention and energy to our core strategy of developing competitive and efficient steelmaking assets in the United States,” Sergei Kuznetsov, Chief Executive Officer of Severstal North America, said in a statement today.

Processors, also known as service centers, shape steel into parts for machinery, manufacturing, construction and transportation and distribute the metal to end-users.

Lazard Freres & Co. LLC and Raymond James acted as financial advisers to Severstal.

— Editors: Steven Frank, Elizabeth Wollman.

To contact the reporter on this story: Edmond Lococo in Boston at