Why Columbus impacted Steel Dynamics’ investors



Columbus impacted Steel Dynamics

Steel Dynamics completed the acquisition of Columbus in 3Q14. The deal was mainly financed by debt. Steel Dynamics raised $1.2 billion in the high-yield bond market—at an average interest rate of 5.3%. The rest of the $1.6 billion deal was funded through internal cash flows. This is why the cash balance fell at the end of the 3Q. In this part of the series, we’ll discuss the financial impact of this funding mix.


Leverage ratios 

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Steel’s leverage ratios are set to increase in the next quarter. Steel Dynamics expects its net debt to earnings before interest, tax, depreciation, and amortization (or EBITDA) to increase 2.8x from the next quarter. The ratio was 2.1 at the end of the 2Q. The full impact of the Columbus transaction will only be visible in the 4Q. Steel Dynamics expects that Columbus will be a key earnings driver in the coming quarters.

Columbus acquisition is a big boost 

The Columbus acquisition expands the steel capacity by 40%. It 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 above chart shows Steel Dynamics’ geographical diversification after the deal.

The deal is expected to be earning per share (or EPS) accretive for Steel Dynamics starting in 2015. An acquisition is said to be EPS accretive when it increases the EPS after the transaction.

However, other factors will drive Steel Dynamics’ performance in the next quarter. We’ll discuss this in the next part in the series.

Investors can gain access to the steel industry through ArcelorMittal (MT), U.S. Steel Corp. (X), AK Steel (AKS), and the SPDR S&P Metals and Mining ETF (XME).

Click here to learn more about steel production in 2014.


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