Undervalued BlueScope Steel to test its mettle as takeover target

BlueScope’s Port Kembla Steelworks. Picture: AAP

The trend for deals this year has always been tipped to involve private equity funds rummaging through the industrials sector to find undervalued takeover opportunities and some say that BlueScope Steel could meet the criteria.

The steel producer, worth $5.98bn, has seen its share price suffer sharp falls this year — from $16 in January to $11.82.

While the Australian operations may not have been faring well of late, its US-based North Star business is considered one of the most profitable mini steel mills in the US, where manufacturing activity is about to ramp up.

For the six months to December, BlueScope generated $185.8m of net profit, which was down 70 per cent on the previous corresponding period.

A decline in commodity steel spreads, flagged in August last year, had been blamed for the poor result.

Like many stocks, coronavirus challenges have no doubt been weighing on the price, along
with climate-change concerns around coal.

Chief executives are reporting that inventory bound for China is not being taken at ports and ships are waiting in the waters.

There has been a trend where international buyers are trying to access strongly performing businesses within Australian listed companies that see their share price dragged lower by weaker divisions, and it is expected to continue.

Last year, Nippon Paper Industries purchased the Nippon Paper Industries business from Orora for $1.72bn and now some expect the remainder of the $3.3bn company will be subject to a break up.

EG is currently bidding only for part of Caltex — its retail fuel and convenience chain along with its service station real estate sites, leaving aside its refinery and infrastructure assets.

There are also suggestions that a similar situation could unfold with groups in the building materials space, including Boral, where a party vies for its attractive Australian and Asian operations, leaving its less highly desired US operation that many believe will likely be demerged by the company’s board.

Fletcher Building is another example, where its Australian operations are less attractive than those it has across the Tasman.

Bluescope’s board is not expected to be a seller of North Star, so any buyer would have to launch a takeover of the company and look through the cycle.

Steel cash spreads are currently about 20 per cent or 30 per cent below their historical average.

Parties in the past that have circled BlueScope include South Korean steelmaker Posco, but its previous interest was in its Asian downstream building products business.

With the US now being a highly protected market, North Star is expected to be even more profitable and has expansion plans under way to increase capacity by over 50 per cent.

Aside from private equity, European-based steelmaking giant ArcelorMittal could have some interest, although questions remain about its balance sheet capacity given its debt levels.

Another buyer could be American steelmaker Nucor, which may see now as a good time to buy BlueScope by capitalising on the low Australian dollar, although it is typically not known for embarking on mergers and acquisitions.