Stelco Holding’s share price could come under pressure if a rumored and "potentially ambitious bid" for United States Steel Corporation (NYSE:X) (US Steel) proceeds due to the possibility of significant share dilution, according to analysts at Stifel.
However, they believe that the likelihood of a successful bid is low given the significant financing requirements and complexity a takeover would involve.
Bloomberg reported that Canada’s biggest steelmaker is pursuing a bid for US Steel and is in talks with a potential partner as the company has a market valuation of about C$2 billion compared with approximately US$7 billion for US Steel.
Citing an unidentified source, the media outlet said Stelco is seeking to purchase the entire company as it looks to increase its portfolio of steelmaking assets and boost its share of the market for supplying metal to the automotive sector.
While the potential partner for the bid was not disclosed, the Stifel analysts said in a report that they suspect it could be Fairfax Financial Group, which currently owns 23.6% of Stelco. Fairfax's current market cap is approximately $30.4 billion and the company ended the second quarter of 2023 with $7.6 bn cash from holding companies and subsidiaries.
“We are not surprised to see STLC's name as a potential suitor, as it is their fiduciary duty to review potential transactions,” the analysts said.
“However, that does not mean a bid will occur or there will be any success in the transaction.”
Stifel has a ‘Hold’ recommendation on Stelco, with a C$37 price target. The analysts believed the company’s shares would have to fall meaningfully to create a trading opportunity.
The company's shares traded 0.3% lower at C$35.90 shortly after noon on Wednesday.
Contact the author at stephen.gunnion@proactiveinvestors.com