Risks outweigh gains for Cleveland-Cliffs and AK Steel deal, says GlobalData

Following the news on 3rd December 2019 that Cleveland-Cliffs Inc. (CLS) has agreed to acquire Ohio-based novel steel products manufacturer AK Steel Holding Corporation (AKS) in a US$1.1bn stock deal;

Aurojyoti Bose, Lead Analyst at GlobalData, a leading data and analytics company, offers his view:

“Cleveland-Cliffs, North America’s largest iron ore pellets producer, believes that the combined entity will be well positioned to cater to the demand for iron ore pellets and steel products in North America.

“Following the announcement, AK Steel share prices rose by 4.2% but CLS share prices were down by 10.7% reflecting a contrasting investor sentiment. This can be attributed to the risks associated with the deal for Cleveland-Cliffs and for investors.

“The deal was executed at a price point more than 10 times the adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of AKS, which also had close to US$2bn in debt at the end of the third quarter (Q3) of 2019. Post-merger, the total debt of the combined entity will amount to approximately US$4bn, which may increase risks multifold in case recession creeps in affecting the demand for steel.

“At the outset, downside risks outweigh potential gains of the deal. Though, it will be pre-mature to predict future stock performance, business performance of the combined entity will remain the key for winning shareholders’ confidence.”

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