Apollo Management, the New-York based private equity arm of Apollo Advisors, recently signed a letter of intent to acquire four divisions of United States Steel Corporation (U.S. Steel). Representatives from Apollo and U.S. Steel declined to give specifics on the individual value of each of the four companies, which will be combined to form one new company.
Under terms of the plan, Pittsburgh-based U.S. Steel would receive approximately $500 million in cash and retain a 20% interest in the new, unnamed company. Mike Dixon, a representative at U.S. Steel, told Buyouts the new company will assume all collective bargaining agreements, certain employee benefit obligations and other liabilities, which “will be clarified as the negotiations are finalized.”
Apollo representatives declined to comment on any aspect of the deal. A representative from U.S. Steel confirmed both parties should reach a definitive agreement by the end of December, and said they expect to close the deal in the first quarter of 2003.
The four companies to be acquired currently employ over 5,300 people. Charles Gedeon, executive vice president of raw materials at U.S. Steel, will leave after 16 years to head up the new company. According to a source close to the deal, initial plans include keeping management teams and employees in place.
The four divisions being rolled into the new company include Clairton, Penn.-based Clairton Works Inc. and Gary Works Inc., headquartered in Gary, Ind. Clairton produces coke for iron and steel production in the commercial coke market, while Gary Works produces coke for flat-steel products used in automobiles, food packaging, appliances and construction. Apollo also acquired Mountain Iron, Minn.-based Minnesota Ore Operations, known as Minntac, a miner and producer of taconite, a rock containing magnetic iron particles used in steel production. The fourth and final division in this yet-to-be-finalized deal is Transtar Inc., U.S. Steel’s transportation arm. Included are all of Transtar’s rail and barge lines, but the deal excludes Transtar Logistics LLC, which specializes in transportation management services. Transtar Logistics was formally known as U.S. Steel’s Distribution and Logistics Unit, and was spun into Transtar Inc. upon U.S. Steel’s purchase of Transtar in May 2001.
U.S. Steel reported 2002 third-quarter earnings of $1.91 billion, more than a $100 million increase from the second quarter of 2002. U.S. Steel estimates the transaction with Apollo, upon completion, could result in a pre-tax loss of up to $300 million.
Apollo Management was formed in 1990, and since its inception has closed five funds totaling more than $13 billion. Apollo recently closed its fifth fund at $3.8 billion. Historically, Apollo has often specialized in buyouts through distressed markets. “We are prepared to own good companies that happen to have bad balance sheets,” said a source at Apollo. “We find companies that may have too much leverage, we can then come in and try to reduce debt, generally through a restructuring process.”