December 1, 2011 11:53 pm

Commercial Metals/Icahn strap in for long ‘cat fight’

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Commercial Metals Company (NYSE:CMC) is unlikely to immediately put itself up for sale in response to Carl Icahn’s offer, two industry sources told dealReporter. But it may turn to a proactive sale effort depending on how serious Icahn’s offer gets, these sources said.

One of the sources said it was his understanding that CMC’s financial advisor, Goldman Sachs, has been making outgoing calls on the name for the better part of the last four to five months, gauging potential interest in the company in the event it were to become available.

However, the first industry source categorized a sale of the company as Plan B for CMC, underscoring that the board of the steel and metal products company does not want to sell.

Speaking to dealReporter, Carl Icahn said “[The CMC] board has hurt its shareholders by making many egregious errors over the last few years. Even though I am cynical about many boards in this country, I believe even this board, under the circumstances, will allow its shareholders to decide whether or not they wish to sell the company.”

A CMC spokesperson declined comment.

On Monday, Icahn Enterprises (NYSE:IEP) proposed to purchase CMC for USD 15 per share without any financing or due diligence conditions, adding that it was prepared to structure the transaction with an immediate front end tender offer. If completed, Icahn said in a letter to CMC’s board that IEP intends to combine the company with PSC Metals subsequent to which it will sell CMC’s non-core assets and immediately appoint a new management team to run the steel business.

CMC said it would respond to Icahn’s letter after reviewing it alongside its advisors, noting that it was not a formal offer. Icahn rebutted via press release stating that the offer was, “in all respects and without any doubt, a formal all cash offer.”

According to the second industry source, a company is typically on a 10-day clock to respond to a formal offer. He said he expects CMC will determine the Icahn proposal to be inadequate and opportunistic.

While the same source said he believed Icahn’s arguments were correct, he said the question is at what price is a takeout fair to CMC. The company’s 52-week high is USD 18.20 per share. Its three year average price is USD 14.73 per share.

Questioned about the likelihood that the situation would be resolved ahead of CMC’s upcoming annual shareholder meeting, one of the industry sources said he doubted it would happen so quickly. Icahn has said he intends to nominate three individuals as directors and make certain proposals at CMC’s 2012 meeting. CMC held its AGM this year on 17 January.

“We’re setting ourselves up for a nice cat fight,” said one of the industry sources, adding that he did not believe the situation would be resolved in the upcoming weeks. Icahn is “prepared to see this thing trade,” the first industry source said.

The activist has a synergistic asset on hand which suggests he has an interest beyond simply agitating, said both sources, also noting that Icahn has some credibility issues on the line following his failed Clorox (NYSE:CLX) deal. CMC’s sinking share price relative to his buy-in cost basis could also be a motivating factor, said one of the sources.

In 2H10, Icahn purchased 3.7 million shares of CMC, during which time the stock hit a high of USD 17.71 and a low of USD 12.12. Through most of June and July, he accumulated a large portion of his 9.98% position in CMC when the company’s stock was bouncing in the USD 14 per share range. Since then, CMC’s stock hit a low of USD 8.60 on 3 October.

“I give him the odds of being successful although the market is skeptical,” said the second industry source, highlighting that the activist has several cards he can play to catalyze a transaction. The first option is launching a hostile tender for CMC.

Icahn could commence a tender at USD 15 per share and depending on the amount of support bump the offer “another buck” to secure two-thirds or three-quarters of the stock, suggested the sources. While the tender would be unable to close so long as CMC’s shareholder rights plan remains in place, the company would presumably be pressured by investors to rescind the poison pill.

In July, CMC announced the adoption of a shareholder rights plan with a 10% threshold following Icahn’s “sudden and rapid ownership increase” to 9.98% from 3.2%.

Alternatively, CMC could at that point open itself up to an auction, said both sources. “I think all would welcome a call from Goldman Sachs or CMC saying its time to talk. But that won’t come for quite some time,” said one of the sources, adding that he expects to see more heat from Icahn first.

If CMC is put on the block, multiple parties are likely to look, both industry sources said, pointing to Brazilian companies Gerdau (NYSE:GGB) and Companhia Siderurgica Nacional (CSN; NYSE:SID) as well as Nucor (NYSE:NUE), Steel Dynamics (NASDAQ:STLD), and Russia’s Severstal.

In an emailed statement to this news service, Gerdau said it “is not interested in buying Commercial Metals Company (CMC).” CSN and Steel Dynamics declined comment. Nucor and a spokesperson for Severstal North America were not immediately available for comment.

One of the sources cautioned that Nucor could trigger antitrust concerns if it pursued a deal, although the other source countered that the Charlotte, North Carolina-based company would likely have overlaps with most assets it would want to study in North America.

CMC would be a “big bite” for Steel Dynamics, which has a USD 2.86bn market capitalization, said both sources. The Fort Wayne, Indiana-based company is also in the midst of a CEO transition, as COO Mark Millett is slated to slide into the chief role on 1 January 2012. It is unlikely that the incoming executive would pursue a transaction without the full support of the board, which includes retiring co-founder and CEO, Keith Busse, said one of the sources.

An acquisition of CMC by Severstal could be a way for the company to secure scrap supply, although it is unclear how ready the company is to invest substantial capital in North America after years of dealing with financial distress.

Despite potential interest, the possibility of an auction frenzy for CMC emerging is remote, said both industry sources. CMC has “always been for sale” but at a price buyers were unwilling to stretch for, said the first industry source, while the second source said Icahn has already thrown the company into play.

Additionally, one of the sources underscored that it remains a less than optimal time for logical CMC suitors to pursue a deal given stocks that have been tumbling most of the year and risks related to acquiring additional steel capacity at a time when demand is seen as flagging and competitors are responding by curtailing supply.

“If they decide to put CMC up for sale, you’ll have an auction and if someone wants to buy it at USD 0.50 over Icahn’s last bid that will take the cake,” speculated one of the sources.

In a long shot effort to get Icahn off its back, CMC could consider buying PSC Metals, both sources said when asked whether this was a possibility. Although, the same sources said the likelihood of this transpiring was practically nil. “I would be very surprised if CMC went down that path or if Icahn were to accept it,” according to one of the sources who noted that this would be an unwelcome option by investors -- especially if, and more likely, when, Icahn launches a hostile tender.

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