Fairfax Financial Holdings Ltd. says it has bought a 13.7 per cent stake in steel producer Stelco Holdings Inc. for roughly $250 million.
The insurance-focused financial services company says it has acquired 12.2 million common shares of the Hamilton-based firm for $20.50 each.
That price represents a 4.2 per cent premium to Stelco’s closing price of $19.67 on Friday.
Stelco Holdings owner Bedrock Industries says it sold the shares to Fairfax and its subsidiaries via a private share purchase agreement.
Bedrock now holds roughly 46.4 per cent of Stelco’s outstanding common shares, down from 60.1 per cent before the sale.
Stelco’s chief executive Alan Kestenbaum says Fairfax’s investment “represents a vote of confidence in our future.”
In 2017, three years after former U.S. Steel Canada filed for creditor protection, Bedrock Industries took control of the Canadian operations, including both its Hamilton and Nanticoke operations.
Michael Gambardella of J.P. Morgan noted “significant upside potential” for Stelco in a report just last week.
With the U.S. continuing to impose tariffs of 25 per cent on steel from Canada, Stelco has been targeting the Canadian market for more of its sales, he said.
While it still is fulfilling old contracts to U.S. customers, it is not cultivating new ones, and expects to have no sales to the U.S. by 2019. Even in the third quarter of 2018, its tariff costs are falling as Stelco concentrates on selling higher value products in the Canadian market, Gambardella said.
Fairfax is in a position to provide capital for Stelco’s major shareholder, says BMO analyst Max Sytchev.
He points out that since it emerged from bankruptcy, the company has resolved its pension obligations and its debt has been written down. Sytchev says Stelco is now in a net cash position after shutting off those balance sheet obligations.