AK Steel Holding Corp. shares rallied Tuesday after iron ore mining company Cleveland-Cliffs Inc. agreed to buy the steelmaker in a $1.1 billion all-stock deal.
However, gains were pared as the stocks of Cleveland-Cliffs effectively lowered the premium of the buyout bid from about 15 percent to around 2 percent.
AK Steel shareholders will receive 0.40 shares of Cleveland-Cliffs common stock for each AK Steel share they own under the terms of the deal, which is expected to be finalized in the first half of 2020.
Depending on Monday's average stock prices of $2.89 for AK Steel and $8.40 for Cleveland-Cliffs, AK Steel trades at $3.36, or a boost of 16 percent. This implies a market capitalization of around $1.06 billion for AK Steel. On Monday, Cleveland-Cliffs had a $2.27 billion market cap.
Shares dropping
As of September 30, AK Steel has $1.97 billion in long-term liabilities, the gross enterprise value of the transaction was around $3.0 billion.
AK Steel's share of AKS grew by more than 4.15 percent in afternoon trading, slashing earlier losses by as much as 6.8 percent, while Cleveland-Cliffs' shares dropped 12.4 percent.
The offer will value AK Steel's stock at current prices at about $2.94, which is 1.9 percent above the closing price on Monday.
All-stock deals often cause the acquiring company's shares to fall as issuing new stock would dilute shareholder value to fund the acquisition.
The announcement of the merger comes one day after US President Donald Trump gave steel producers' shares a boost by saying he brought back tariffs on steel imports from Brazil and Argentina as a retaliation for devaluations in currency. AK Steel's shares rose 4.8 percent late Monday and Cleveland-Cliffs' stock was up 5.4 percent.
Huge stake
Cleveland-Cliffs investors will own 68 percent of the combined company, which will be headed by current Chairman and Chief Executive Lourenco Goncalves of Cleveland-Cliffs. Roger Newport, chief executive officer of AK Steel, will retire.
The companies estimate the merger to produce around $120 million in cost per year that are seen to be achieved within the first year of completion, mainly through consolidating administrative operations, and reducing redundant overhead and energy costs in the supply chain.
Analyst Matthew Miller at CFRA reduced Cleveland-Cliffs' stock price target from $4 to $9, but reiterated his 'Strong Buy' rating.
"While the acquisition is dilutive in share count, in the first full year we expect earnings per share and free cash flow per share accretion," Miller wrote to customers in a note.
