Steel investors and steel managers are trembling this morning -- but for two entirely different reasons. While one group trembles with greed, the other does so with fear -- because it looks like someone's gettin' 'et.
Steel titan Nucor (NYSE: NUE ) announced plans yesterday to raise about $3 billion in stock and debt offerings, plumping out its war chest to nearly $4 billion. The reason is no mystery. It's right there in the press release: "Nucor intends to use the net proceeds from the offering for general corporate purposes, including acquisitions, capital expenditures, working capital needs and repayment of debt" (emphasis added).
How much d'you want for that bond?
Speaking of emphasis, I'd actually de-emphasize the "repayment of debt" part of Nucor's statement. The fact that management aims to sell 25 million shares of stock at first suggests that Nucor believes its stock is overvalued, and that now's a good time to cash in some chips and use the proceeds to pay down debt. But two facts argue against that interpretation:
- First and foremost, Nucor isn't all that heavily in debt. Its 0.5 debt-to-equity ratio compares favorably to those sported by U.S. Steel (NYSE: X ) and giant Arcelor Mittal (NYSE: MT ) , as well as to (relative) pipsqueaks like AK Steel (NYSE: AKS ) and Steel Dynamics (Nasdaq: STLD ) . If rivals both large and small are comfortable carrying relatively more debt than Nucor, it seems unlikely that Nucor management feels compelled to lighten its own load.
- Second, in addition to the secondary offering, Nucor confided that it also plans to "raise up to $1 billion in the debt capital markets in the near term." Granted, it's not unheard-of for companies to make illogical head-fakes with their capital structure -- for example, by splitting their shares to "increase liquidity" while simultaneously buying back shares (to what? sop up excess liquidity?). But logically, if Nucor is issuing more debt, it's not likely planning to reduce its debt load.
So what is Nucor up to?
Like I said, somebody's gettin' 'et. For years, foreign steelmakers have been on a mergers & acquisitions spree, both in their own backyards and in ours. My hunch is that Nucor thinks this isn't a half-bad idea, and aims to make a few more acquisitions of its own.
Playing that hunch, I ran a few numbers through Yahoo!'s stock screener last night, and came up with a few possibilities. Assuming that:
- Nucor is willing to commit its current $734 million cash stash to its efforts;
- By the time it floats the new shares, they sell somewhere around what Nucor shares fetch today;
- The underwriters exercise their overallotment options in full; and
- Nucor raises the anticipated $1 billion in debt ...
… I come up with a war chest of almost exactly $4 billion.
What can you get for $4 billion these days?
With the disclaimer that the following is purely hypothetical, and that I have no special knowledge of Nucor's plans, two names in particular popped out at me that Nucor could buy outright with a $4 billion war chest: Schnitzer Steel (Nasdaq: SCHN ) and Worthington Industries (NYSE: WOR ) .
Even assuming a sizeable deal premium, it looks to me like Nucor's venture into the capital markets could enable a swallowing-whole of Schnitzer. And to me, that company's business of recycling steel scrap into marketable metal products seems to fit best into Nucor's own business model. That, plus the fact that I admire Schnitzer as a business almost as much as I like Nucor and Steel Dynamics, seems to me to make this one the most logical target of Nucor's desire.
That said, Nucor usually sticks to small acquisitions, often of privately held companies. Rather than blowing its cash all in one place, Nucor could just as easily intend to use its cash to expand capacity internally, and perhaps make a small, bolt-on acquisition or two.
We'll know soon enough, one way or the other.
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