International steel group Evraz has announced plans to sell 85% of South African steel and vanadium producer Evraz Highveld to a black economic-empowerment (BEE) consortium for $320-million – the transaction would be the largest BEE deal in the South African steel sector.
A non-binding term sheet had been signed with a consortium represented by an entity known as Nemascore, about which little information was immediately available.
In fact, market observers were taken by surprise both by the size of offer and the lack of information about the BEE purchaser.
Industrial Development Corporation (IDC) mining and manufacturing divisional executive Abel Malinga said the development financier had not yet been approached on the proposed transaction. He also confirmed that the IDC was not a member of the Nemascore consortium.
However, Malinga did not discount a possible future approach.
Shares in Evraz Highveld, which closed at R13.30 on March 27, surged in early morning trade to over R23.55, as the offer was seen as generous and Evraz also confirmed that, should the deal become unconditional, a mandatory offer would be made to all the remaining shareholders.
The company currently has a market capitalisation of around R2.3-billion, while the offer values the company at closer to R3-billion.
However, one analyst was concerned about the credibility of the offer in the context of a business that probably still required a significant recapitalisation post any transaction, to ensure cleaner and more stable operations.
Evraz, which purchased the business from Anglo American in 2006, said it would use the sale proceeds for general corporate purposes.
It indicated that the transaction, which was still the subject of a due diligence process and also still required regulatory sanction, should be completed during the course of second quarter of 2013.
Transitional arrangements had also been agreed, whereby Evraz would support the South African management to ensure "stable operations and a smooth transfer of the business".
Following a four-week strike in July and August last year and a slow and “difficult” resumption of operations, Evraz Highveld reported a major decline in full-year production of both steel and vanadium during 2012.
It also announced a 22.4% slump in revenue to R4.4-billion and a massive 2 195% fall in net profit from R45-million in 2011 to a loss of R943-million last year.
Evraz CEO Alexander Frolov said the decision to divest should not effect the group’s leading position in global vanadium markets and would enhance its focus on steel markets in Russia and North America.
“Our future growth in vanadium is based on an integrated business model that involves our assets in Russia, the US, Europe and our remaining operations in South Africa.
“We plan to continue close collaboration with the future owners of the mill with respect to the vanadium business in South Africa,” Frolov said.