Fairfax buys 13.7% stake in Stelco for $250M as steel surges

Fairfax Financial Holdings Ltd. says it has bought a 13.7 per cent stake in steel producer Stelco Holdings Inc. for roughly $250 million.

Bedrock Industries, which took over bankrupt U.S. Steel Canada, still holds 46.4%

Financial Services Company Fairfax has purchased $250 million in shares of Stelco. (CBC)

Fairfax Financial Holdings Ltd. says it has bought a 13.7 per cent stake in steel producer Stelco Holdings Inc. for roughly $250 million — marking another sign that the once-beleaguered steel company is finding its way.

The insurance-focused financial services company says it has acquired 12.2 million common shares of the Hamilton-based firm for $20.50 each.

That price represents a 4.2 per cent premium to Stelco's closing price of $19.67 on Friday.

Stelco Holdings owner Bedrock Industries says it sold the shares to Fairfax and its subsidiaries via a private share purchase agreement.

Bedrock now holds roughly 46.4 per cent of Stelco's outstanding common shares, down from 60.1 per cent before the sale.

Stelco's chief executive Alan Kestenbaum says Fairfax's investment "represents a vote of confidence in our future."

At the moment, they almost seem like they have a licence to print money.- Marvin Ryder, McMaster University business professor

Chuck Bradford, a steel industry analyst based in New York City, told CBC News that Kestenbaum has a history of purchasing companies as a kind of trader who, after a turnaround, sells off shares.

He pointed to Miami-based Globe Specialty Metals Inc. as an example. Kestenbaum bought the company for $1 million in 2006, but now, after 11 acquisitions and a merger the company is worth about $2.7 billion. 

"They sold off a lot of assets from them, too," he said.

McMaster University professor Marvin Ryder says that at least for the moment, it's a prosperous time for Stelco. (Kelly Bennett/CBC)

In 2017, three years after former U.S. Steel Canada filed for creditor protection, Bedrock Industries took control of the Canadian operations, including both its Hamilton and Nanticoke operations.

Michael Gambardella of J.P. Morgan noted "significant upside potential" for Stelco in a report just last week.

With the U.S. continuing to impose tariffs of 25 per cent on steel from Canada, Stelco has been targeting the Canadian market for more of its sales, he said.

While it still is fulfilling old contracts to U.S. customers, it is not cultivating new ones, and expects to have no sales to the U.S. by 2019. Even in the third quarter of 2018, its tariff costs are falling as Stelco concentrates on selling higher value products in the Canadian market, Gambardella said.

Fairfax is in a position to provide capital for Stelco's major shareholder, says National Bank analyst Max Sytchev.

He points out that since it emerged from bankruptcy, the company has resolved its pension obligations and its debt has been written down. Sytchev says Stelco is now in a net cash position after shutting off those balance sheet obligations.

McMaster University professor Marvin Ryder echoed that statement, and said "at least for the moment, this is a very profitable company."

"It's because they got rid of these liabilities," Ryder said.

It also helps, Ryder said, the U.S. President Donald Trump's tariffs have, however inadvertently, driven up the price of steel to over $1,000 per ton.

"At the moment, they almost seem like they have a licence to print money," he said.

With files from The Canadian Press