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Wall Street bets on sale of U.S. Steel

Joe Napsha
| Thursday, Nov. 10, 2011

Traders on Wall Street are growing more convinced that someone will acquire U.S. Steel Corp., the cheapest steelmaker in America.

Traders who make money betting on future stock prices of companies drove the steelmaker's stock higher in the past month before Wednesday's overall market retreat. Bullish bets on the steelmaker exceeded bearish wagers by 34 percent last week, the highest level since February 2010, Bloomberg data show.

The bullish buying in the options market rose as speculation of takeovers in the steelmaking industry helped to lift U.S. Steel's stock from its lowest point in more than 30 months, said JonesTrading Institutional Services LLC.

U.S. Steel's shares closed Wednesday at $25.27 a share, down $2.27, or 8.24 percent.

Erin DiPietro, a spokeswoman for Pittsburgh-based U.S. Steel, said it doesn't comment on rumors and speculation.

Although U.S. Steel is the nation's only steelmaker trading below the value of its assets, buyers might be deterred by a global economic slowdown that depresses steel demand, U.S. Steel's pension plan deficit of almost $2 billion and mounting debt.

"You have a classic tug-of war going on," said Michael Holland, chairman and founder of New York-based Holland & Co., whose firm oversees more than $4 billion. Still, "there's a real question as to whether the speculators who are looking for a takeover will be rewarded. The company isn't just a steelmaking operation. It also has a load of debt and liabilities which saddles the operation," he said.

"It definitely could be an attractive takeover candidate," said Rick de los Reyes, who manages $800 million at T. Rowe Price Group Inc.'s Global Metals and Mining Fund in Baltimore. T. Rowe owned 7.5 million U.S. Steel shares as of June 30, making it the third-largest holder. "If you look at them on just a pure asset value basis, a price-to-book basis, it's looking pretty cheap to me."

But steel industry analyst Charles Bradford of Affiliated Research Group of New York, chalked up reports to mere speculation.

"These kind of rumors have cropped up periodically," Bradford said. A few weeks ago, people said Warren Buffett was interested in acquiring the steelmaker, but nothing came of it, Bradford said.

It is not likely that Russian billionaire Alexi Mordashov's Severstal North America would want to buy it, Bradford said. Mordashov lost money by buying steelmaker Esmark Inc. during a strong economy in 2008, then selling parts of Esmark once owned by the former Wheeling-Pitttsburgh Steel Corp. as the economy soured.

Under economic conditions, with the price of iron ore falling from $177 a ton in September to $130 a ton and weak steel prices, "I don't know who would buy it," Bradford said.

U.S. Steel's third-quarter results benefitted from strong pipe production for the oil and natural gas industries. The company's tubular segment had its best quarter since 2008, with $134 million in income from operations, or $279 per ton. Demand for its tubular products remained firm, CEO John Surma told analysts.

"There's a likelihood that there may be a massive overcapacity" on tubular products, because companies are going into that business, Bradfrod said.

U.S. Steel's stock price fell to a more than two-year low in October as concern that slumping economic growth in the United States and Europe would hamper sales of steel. Then bullish bets on a takeover pushed the stock up 36 percent through Tuesday.

The United Steelworkers could hinder prospects of a takeover because the union has the "first right of refusal on a change of control," said Michelle Applebaum, managing partner at equity research firm Steel Market Intelligence in Chicago.

U.S. Steel has a $1.98 billion shortfall on pension benefit obligations that totaled $10.6 billion last year, data compiled by Bloomberg show, the most underfunded plan among American steel producers. In addition, with borrowings exceeding cash by $3.64 billion, U.S. Steel has more net debt versus equity value than any of its competitors greater than $1 billion.

"The stock is depressed and cheap," said Walter Todd, co- chief investment officer at Greenwood Capital in Greenwood, S.C., which manages $940 million. "On the flip side, you have the pension and fundamental overhang with the company. There are definitely some hurdles to be crossed before somebody comes in and acquires them."

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