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U.S. Steel continues to explore options

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By C.m. Mortimer
Sunday, Jan. 7, 2007

U.S. Steel Corp. still is eyeing Middletown, Ohio-based AK Steel Corp., or it could go shopping for a raw materials supplier in Central or Eastern Europe as steel industry consolidation continues, analysts said.

Merger mania was resurrected when Nucor Corp., the second-largest U.S. steel producer behind U.S. Steel, last week agreed to acquire Toronto-based Harris Steel Group Inc. for about $1.07 billion.

Conjecture over a possible U.S. Steel takeover of AK Steel surfaced in March. "Last year, their board was looking at AK Steel, and I heard they're still watching it," said independent analyst Charles Bradford, of Soleil Securities in New York.

Bradford said he understood U.S. Steel may be looking in Central and Eastern Europe, where assets are cheaper.

"Domestically, they have the iron ore and coke they need. In Central Europe, they don't have any of that. They may also be looking at smaller, government-owned steel companies," said Bradford, who did not identify potential foreign targets.

U.S. Steel operates a plant in Kosice in the Slovak Republic, the largest flat-rolled steel producer in Central Europe. The company operates U.S. Steel Serbia, too.

U.S. Steel CEO John Surma told analysts during a third-quarter conference in November that the company is not ruling out acquisitions. "We think there still could be opportunities to expand our footprint," he said.

"We believe in consolidation, and we continuously evaluate strategic opportunities focusing mostly in North America and Europe. Any acquisition we would make, however, would have to create value for our company and our shareholders. It has to generate a good return on capital, has to be accretive and generate cash," said Charles L. Rice, spokesman for U.S. Steel.

AK Steel declined comment on speculation involving U.S. Steel, said spokesman Alan H. McCoy.

Bradford said another potential target could be Illinois-based IPSCO Inc., a producer of tubular products and steel plate, with annual steelmaking capacity of 4 million tons. "It could be a good fit for U.S. Steel because IPSCO has assets in Canada," he said.

U.S. Steel may be interested in a steel processing company, said Ivan Feinseth, director of research for Matrix USA, LLC, New York.

Feinseth named Columbus, Ohio-based Worthington Industries, which processes steel and makes steel products for the automotive and aerospace industries, and Los Angeles-based Reliance Steel & Aluminum Co., a large metals service company, which also produces hot-rolled and cold-finished steel.

Feinseth said a potential acquisition target could be Grupo IMSA, a Mexican steel processor whose products include galvanized metal plate, cold and hot-rolled metal plate.

U.S. Steel may also look overseas.

"They may do something in Europe to bolster their raw material position there," said Leo Larkin, equity analyst for Standard & Poor's in New York.

Larkin said U.S. Steel's interest in AK Steel may be lukewarm, and obstacles could include labor difficulties, health care and pension liabilities and potential anti-trust reviews. "It could happen, maybe my anti-trust concern is overblown," Larkin said.

AK Steel generated revenue of about $6 billion in 2005. The company remains mired in an 11-month labor dispute at its Middletown plant, with the International Association of Machinists Local Lodge 1943, which represents about 1,800 members.

U.S. Steel's stock has surged in the past year on speculation it could be an acquisition target. It closed Friday at $69.72, down 92 cents. It gained 46 percent in 2006.

"All of the big steel companies could be interested," said Matrix USA's Feinseth, who estimated the value of U.S. Steel anywhere from $85 to $90 per share.

S&P's Larkin mentioned POSCO, a South Korean steelmaker, as a possible suitor. "POSCO has a strong balance sheet, and they're in an expansion mode. It would strike me as logical, and they have the financial strength to pull it off," Larkin said.

POSCO shipped about 30 million tons of steel, generating about $26 billion in revenue in 2005. During the same period, U.S. Steel shipped about 25 million tons of steel and generated revenue of about $14 billion.

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