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When I originally thought of creating this blog and forming the Financial Freedom is a Journey Community, my intent was to provide a forum in which a community of people could share ideas on how to become financially free.
My wife and I became financially free several years ago. I can assure you that once you become financially free it is a whole lot easier to cope with less than pleasant things that are bound to surface at some stage of your life.
We became financially free by doing several things right. Two of those "things" were to:
- invest in wonderful companies and let them do the heavy lifting for you;
- avoid fair companies regardless of valuation as the likelihood is they will just part you from your money.
In today's post I want to share with you something that will help you with point #2 reflected above. This post is particularly pertinent to Canadian residents.
Stelco's Impending Initial Public Offering
Stelco has recently filed a preliminary prospectus for an Initial Public Offering (IPO). This article starts off with “Good news from Stelco”. Perhaps it might be good news for Stelco but it is highly likely to be bad news for anybody who decides to invest in the company.
Stelco History
Stelco (The Steel Company of Canada) was established in 1910. It was founded after the merging of the Hamilton Steel and Iron Company, Canada Screw Company, Montreal Rolling Mills, the Dominion Wire Manufacturing Company, and the Canada Bolt and Nut Company.
The last few decades have been extremely challenging for Stelco. In 2004, Stelco’s financial difficulties caught up with it and it went under court-ordered protection from its creditors.
It exited Companies' Creditors Arrangements Act (CCAA) protection on March 31, 2006 and after having divested itself of several non-core operations, it restructured the remaining operations into 9 separate operating businesses, held by the corporate entity of Stelco.
On August 27, 2007, United States Steel Corporation (US Steel) (NYSE: X) – another terrible company in which to invest - purchased Stelco for $1.9 billion ($1.1 billion in cash, and the assumption of $800 million in debt). The deal closed October 31, 2007 and the company was renamed U.S. Steel Canada Inc. and it was delisted from the Toronto Stock Exchange (TSX). While ownership changed and the name changed, the company was still garbage. This investment was totally disastrous for US Steel.
On March 3, 2009 in an effort to turn a profit on its sizable investment, U.S. Steel announced it would temporarily shut its Hamilton plant and most of its Lake Erie plant. This put more than 2,000 people out of work and the announcement came 4 months after US Steel laid off 700 employees at the Hamilton plant when it shut down its blast furnace.
Matters continued to deteriorate and on October 1, 2010, US Steel shut down the Hamilton Works operations. The remaining operations limped along for the next few years but on September 16, 2014, US Steel Canada waived the white flag and announced that it would apply for court protection from its creditors. US Steel then stated that it intended to sell all of its remaining operations in Hamilton in the next couple of months.
In 2015, US Steel Canada was severed from US Steel and in November 2016, a deal was struck to sell US Steel Canada to Bedrock Industries; the company took on the "Stelco" name again on December 2, 2016.
Interestingly, Hamilton’s mayor at the time of the 2016 acquisition (Fred Eisenberger) said he “believes Bedrock plans to invest heavily and stay around”. I wasn’t so sure about this when I heard the news. My inkling was that the new owners would step in, make some quick changes, and then try to recover its investment so it could move on to its next target as soon as the opportunity presented itself.
Brutal Industry
I don’t mean to sound cynical but this industry is brutal and I strongly suspect it is not going to get better any time soon. Fueled by debt, the Chinese steel manufacturers have essentially decimated the competition. A few years ago Chinese steel manufacturers had essentially cornered 49% of the global steel market.
How have Stelco’s non-Chinese competitors fared?
In a nutshell...."Not well at all".
Just look at US Steel’s stock chart (NYSE: X). In addition, it cut its $0.30/share dividend to $0.05/share in 2009 and it has remained unchanged since then.
You want another example of a steel company in deep trouble? Look at the American Depository Receipt stock chart for ArcelorMittal SA (NYSE:MT) for the past several years. Things are so bad for MT that they had to resort to a 1 for 3 reverse stock split earlier in 2017.
That’s not enough for you? Look at the American Depository Receipt stock chart for Gerdau SA (NYSE: GGB). UGH! One time this stock traded hands in the mid $20s. It now trades until $4.
Even Nucor Corporation (NYSE: NUE), perhaps one of the better operators in the steel industry, has not exactly set the world on fire.
Proceeds from Stelco's Impending Initial Public Offering
According to Stelco’s preliminary prospectus filed with securities regulators in Canada for a proposed initial public offering of its shares, funds from the IPO will be used for capital investments to develop new products and enhance Stelco’s production capabilities. In addition, funds will also be used for early payment to certain pension and other post-employment benefits trusts, and for general corporate purposes, which could include additional capital investments.
An overview of the proposal for the restructuring of Stelco released in December 2016 can be found here. As you can see, all 4 of Stelco’s main pension plans are underfunded.
If you decide to invest in Stelco you are essentially shoring up underfunded pension plans which should essentially have been done by previous owners.
While details have yet to be released as to how many shares will be sold or how much they will cost, I suspect the parties who stepped up to the plate prior to the IPO will receive some of the IPO proceeds. Anybody in their right mind who took on the challenge of getting Stelco to the stage where it could be taken public will want to be rewarded handsomely for their time and effort.
Stelco's Impending Initial Public Offering – Avoid It at All Costs
Warren Buffett, Chairman and CEO of Berkshire Hathaway Inc. is infamous for sharing his pearls of wisdom, one of which is:
"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
I have absolutely no details of the terms and conditions are of the Stelco IPO. That, however, that does not really matter because Stelco is not even a fair company.
Folks, my mother always told me that if I don't have anything nice to say then don't say anything at all. I didn't always listen to my mother. To this day I still don't so I am going to be perfectly blunt. An investment in Stelco is very highly likely going to part you from your money.
The odds of Stelco succeeding and not slipping back into creditor protection within the next decade are slim. Stelco’s track record is not enviable and the industry is not becoming less competitive.
Look at the results for US Steel, ArcelorMittal, Gerdau, and Nucor over the past several years. None of them are worth writing home about. What makes you think Stelco is in a different boat?
If you take a look at my FFJ Master Stock List and the companies in the FFJ Portfolio, you will not see companies of inferior quality like Stelco.
I have absolutely no interest in acquiring any shares in Stelco. Unless you want to be parted from your hard-earned money I also strongly suggest you “stay away”!
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this post. As always, please send me any feedback and questions you may. Don't forget to join the Financial Freedom is a Journey Community!
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I have no position in any of the companies referenced and have no intention of initiating a position in the foreseeable future.
I wrote this article myself and it expresses my own opinions. I receive no compensation and have no business relationship with any company mentioned in this article.
