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There was some pretty big M&A news in the steel space over the weekend with Cleveland-Cliffs (CLF) announcing it will acquire Canadian steelmaker Stelco. It is a cash-and-stock deal comprised of C$60 in cash plus C$10 (0.454 shares of CLF) for each share of Stelco, which does not trade in the US but does trade on the Toronto Stock Exchange. Upon completion, CLF shareholders will own 95% of the combined company and Stelco shareholders will own 5%.

• The transaction implies a total enterprise value of approximately $2.5 bln (or C$3.4 bln) for Stelco and represents an acquisition multiple of 4.8x LTM Adjusted EBITDA with synergies. Cliffs estimates the deal will achieve approximately $120 mln of annual cost savings with no impact to union jobs. CLF expects the acquisition will be immediately accretive to 2024 and 2025 EPS.
• Stelco is an integrated steelmaker consisting of two operational sites, both located in Ontario: Lake Erie Works, which is says is the newest and lowest-cost integrated steelmaking facility in North America; and Hamilton Works, a downstream finishing and cokemaking facility. Stelco ships approximately 2.6 mln net tons of flat-rolled steel annually, primarily hot-rolled steel to service center customers.
• Cleveland-Cliffs is already the largest flat-rolled steel producer in North America. This deal doubles Cliffs' exposure to the flat-rolled spot market, with cost advantages in raw materials, energy, healthcare, and currency. CLF also notes that Stelco adds capabilities that complement Cliffs' existing operations and product portfolio, while diversifying its customer base across the construction and industrial sectors.
• CLF has been active on the M&A front. In March 2020, CLF acquired AK Steel for $1.1 bln. Then, in December 2020, it acquired the US assets of ArcelorMittal (MT) for $1.4 bln. As a result, CLF became the largest flat-rolled steel producer in North America and the largest iron ore pellet producer in North America. Also, recall that CLF tried to buy US Steel (X) last year, but was rebuffed. US Steel later agreed to be acquired by Japan's Nippon Steel.
• CLF said on the call that, in recent years, Stelco has transformed from an underperforming steel company under previous ownership into one of the highest margin steel companies in North America. As such, CLF sees Stelco as a plug and play asset. Unlike the ArcelorMittal USA assets that needed massive investments/repairs, this asset will be low capital intensity. Stelco will be the lowest cost and highest EBITDA margin flat rolled asset in CLF's entire footprint.

Overall, we think this is a nice pick up for CLF as it solidifies its dominant position in the flat-rolled space. The valuation seems fair and Stelco has made significant strides in its turnaround. On the flip side, manufacturing activity remains weak and Stelco uses higher-cost union labor. However, we think the timing of this deal could work out well if the Fed cuts rates soon, as expected. That could give a jolt to the manufacturing space just as this deal is expected to close in Q4.