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Why the Columbus acquisition is a key driver for Steel Dynamics

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Columbus exits U.S. markets

Columbus is the North American unit of Russian steel maker Severstal. Severstal decided to exit the North American market by selling its operations. It’s believed that the decision was a result of the ongoing tensions between Russia and the U.S. Without getting into the politics behind it, we’ll analyze the rationale of the acquisition for Steel Dynamics.

severstal

Columbus acquisition will be a big boost for Steel Dynamics

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Steel Dynamics has seen stagnant revenues for almost three years in a row, as we saw earlier. The Columbus acquisition expands the steel capacity by 40% and brings in $2 billion of annual revenues for Steel Dynamics. It also increases Steel Dynamics’ geographical footprint. It provides access to the southern U.S. and Mexican markets. The chart above shows the geographical diversification for Steel Dynamics after this deal.

Columbus is an advanced mini mill. It was established in 2007. It adds to Steel Dynamics’ low cost operations. Newer plants have less maintenance issues and use the latest technologies. As a result, they’re more cost efficient. Steel Dynamics’ management also expects synergies of $30 million from the deal. The deal is expected to be earning per share (or EPS) accretive for Steel Dynamics from 2015 onwards. An acquisition is said to be EPS accretive when it increases the EPS after the transaction.

The dynamics behind the deal

One of the most important criteria for an acquisition is the financial aspect. This  includes the purchase price and the funding mix. Steel Dynamics (STLD) bought Columbus for $1.6 billion. The deal will be funded through a mix of internal accruals and new debt. Next we’ll analyze Steel Dynamics’ balance sheet. We’ll also discuss how the acquisition impacts the company’s financial health.

The steel industry has been challenging for many steel companies like ArcelorMittal (MT), U.S. Steel Corporation (X), and Nucor Corporation (NUE). The SPDR S&P Metals and Mining ETF (XME) is a way for investors to gain access to the steel industry.

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