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Icahn has publicly offered $15 a share for Commercial Metals, an offer that totals about $1.73 billion and represents a 31% premium to Nov. 25, 2011's, close. That said, it's not an especially generous offer. Commercial Metals has been in a slump lately, but was trading above $15 as recently as May, despite what has been a bad operating environment for better-regarded mini-mill competitors, like Nucor (NYSE: NUE) and Steel Dynamics (Nasdaq: STLD).
Moreover, while the deal would look to be something of a premium to average full-cycle enterprise multiple for this industry, the trailing EBITDA at Commercial Metals has been depressed of late. (To know more about EBITDA, read: A Clear Look At EBITDA. )
What Icahn Hopes To Achieve
Icahn has been a significant shareholder of Commercial Metals for some time now, and as is so often the case, he hasn't spent that time sending love letters to company management. While Icahn did not go into great detail in his public letter to the board, he clearly has little faith in management's ability to create further value for shareholders.
In particular, Icahn seems to want to combine CMC with his existing metals recycling business, PSC Metals, and sell off company assets that do not compliment that business. In other words, it basically means a tearing-down of the semi-integrated model that Commercial Metals has pursued for years; it was one of the first companies in the space to buy its own scrapping capacity and it expanded into Europe, with facilities in Poland and Croatia.
To that end, Icahn has a point. Although expanding into Eastern Europe made some sense at the time, it has not delivered the returns that management sold to its shareholder base. The Polish operations have done reasonably well, but the Croatian operations are a mess and management has decided that it makes more sense to get out of it entirely, as opposed to investing the capital necessary to turn it around. (For additional reading, check out: Why Do Companies Merge With Or Acquire Other Company?)
The Quickest, Best Hope for Shareholders?
It seems pretty likely that on the basis of Icahn's offering price, Icahn and his shareholders will reap the lion's share of the benefit from the operating improvement he foresees; based on his track record, Icahn would likely argue that that's the way it should be. However, what should Commercial Metal shareholders think about all of this?
There's nothing from the managements of Steel Dynamics, Nucor, Commercial Metal, Alcoa (NYSE: AA), Arcelormittal (NYSE: MT) or Freeport-McMoRan (NYSE: FCX), that suggests immediate improvement in primary metals, allowing that the latter three operate very different businesses than the first three. Accordingly, frustrated Commercial Metals investors may regard this as an opportunity for a somewhat more dignified exit from their position.
On the other hand, even allowing for CMC's less-than-stellar management, it would seem that patient shareholders could realize just as much value, waiting for an eventual turnaround in U.S. steel demand, from markets like infrastructure and construction. Consequently, it would seem likely that some shareholders will support this move, but others will look at it as an opportunistic offering that just doesn't bring enough value.
The Bottom Line
As of this writing, Commercial Metals management has not commented on the offer, but the fact that Icahn went public with this letter and this offer, suggests that management will say "no." Steel Dynamics and Nucor are superior plays on the U.S. steel and mini-mill markets, but Icahn's involvement here guarantees that this stock has more volatility in its near future.
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.