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Russia’s Severstal sells U.S. steel plants to AK Steel, Steel Dynamics

Russian billionaire Alexei Mordashov -Russia's Severstal sells U.S. steel plants to AK Steel, Steel Dynamics

Russia’s Severstal said it agreed to sell its two U.S. steel plants for $2.3 billion, withdrawing from the U.S. market at a time of rising tension between Russia and the West and turning its focus to its domestic business.

The company said today it would sell subsidiaries Severstal Columbus in Mississippi and Severstal Dearborn in Michigan — the former Ford Rouge steel mill operations — to Steel Dynamics and AK Steel Corp., respectively, a sale which may allow the steelmaker to pay an extra dividend and reduce debt.

Severstal, Russia’s second-biggest steel producer, said in May that it was considering a range of strategic options for its plants in Mississippi and Michigan, which produce steel products mainly for the automotive sector, having earlier divested steel plants in Maryland, Ohio and West Virginia.

Steel Dynamics’ $1.625 billion purchase of Severstal Columbus will be funded with a mix of cash and debt, the company said in a statement. Built in 2007, Columbus is one of the newest mini-mills in North America, it said. The mill has a production capacity of 3.4 million tons, boosting Steel Dynamics’ annual steel shipping capacity to 11 million tons.

AK Steel is paying $700 million in cash for the Rouge assets, it said. The company is funding the acquisition through a debt and share deal it expects to complete in the fourth quarter, the producer said in the statement.

The sale comes as tensions between Russia and the West grow over Moscow’s involvement in the Ukraine crisis, which has already resulted in a series of sanctions against Russian companies and individuals and may lead to further sanctions.

Severstal, controlled by Russian billionaire Alexei Mordashov, said that politics did not influence its decision to sell its U.S. businesses but some analysts think the situation may have weighed on the final decision and the timing of the sale.

“The political sentiment could have pushed them to do it because it is safer for them to stay away from the U.S. market,” said a London-based analyst, who declined to be named due to the sensitivity of the subject.

Severstal North America made up about 30 percent of the group’s revenue.

The Russian steelmaker embarked on a series of international acquisitions in the early 2000s, near the peak of the cycle for steel and commodities. In the last couple of years, however, its focus has switched from international growth to its higher margin domestic Russian steel market.

Large steelmakers, including ArcelorMittal, Tata Steel and ThyssenKrupp, have been cutting production, jobs and idling or selling plants in the last few years in response to oversupply, weaker steel prices and sluggish demand.

The U.S. steel industry has been dogged by excess capacity and depressed prices since the financial crisis. As of July 14, 21 percent of its capacity was unused, according to data from the American Iron & Steel Institute. U.S. steelmakers have also fought a succession of legal battles to curb cheap imports.

“The Russian domestic business is more profitable than other parts of the business and that’s why other parts, such as the U.S. branch, have lost some their appeal,” said Credit Suisse analyst Semyon Mironov. “On top of that the U.S. part of the business has always traded at higher valuations that the Russian part so, from the shareholders perspective, if you can get a better price because of the geography, why not selling it.”

Some analysts, however, say selling assets in the United States, a market that they see recovering in the next few years, is a questionable strategy.

“The sale has been talked about for quite a while but these assets are in pretty good shape, they are free-cash-flow positive so there was no rush for a sale,” said VTB Capital analyst Vadim Astapovich.

“The sale will improve their total margin because the U.S. assets are lower margin than the Russian ones but every penny counts and these assets are still money making.”

Although the company was already pretty financially solid, having reduced its debt from a peak of $8.3 billion in 2008 to $4.8 billion in 2013, according to Thomson Reuters data, analysts said the cash it will obtain from the sale will allow it to reduce debt further or to pay a special dividend.

The closing of the deal is not subject to any financing conditions and is expected by the end of 2014.

Last week, Severstal said it had agreed to sell Pennsylvania-based metallurgical coal producer PBS Coals to Canada’s Corsa Coal for an enterprise value of $140 million.