By Stuart Burns
According to a Businessweek article, Carl Icahn, the veteran investor and corporate raider, has gone hostile on his bid for steelmaker, recycler and metals trader Commercial Metals Corporation (CMC) after the board turned down his $15/share all-cash bid for a majority stake in the firm, saying the bid “substantially undervalues the company and is an opportunistic attempt – at a time when we are at a low point in the economic and industry cycle – to transfer the future value of CMC from its stockholders to Carl Icahn,” according to the Financial Times.
CMC operates in five different markets, spanning scrap metal, US steel mills, and the fabrication of reinforcing bars used in construction and international operations in Poland and Croatia. The firm has been under-performing since the construction market collapsed in 2008 and the share price has dropped 16 percent this year with further negative expectations in the fourth quarter and full year.
Nevertheless, Kuni Chen, an analyst with CRT Capital Group, is quoted as saying the firm could be worth $25/share if broken up. The board has responded, saying they intend to sell off non-core assets such as the under-performing Croatian mill and re-focus on the North American ones, much as Mr Icahn is proposing; although he also claims there will be benefits from merging CMC into his metal recycling business PSC Metals.
Benefits appear limited though, as PSC is concentrated on the East Coast and Canada, whereas CMC’s scrap-consuming rebar mills are spread all over the US, with many in the West and South. Rationalization of the recycling plants in eastern states will likely not grow sales — quite the opposite — so on the face of it we are inclined to agree with the board’s position that this is an opportunistic bid for what is quite possibly an undervalued company.
The preferred outcome could be that the stimulus of Icahn’s bid pushes the board into cutting poorly performing non-core assets sooner rather than later, because the firm’s Q4 report was unrealistically optimistic regarding market conditions in Europe, Australia and quite possibly Asia expected in the following quarter.
If the firm is to stem the flow of red ink, it will need more action and less blind faith in a market recovery. We somehow suspect, though, that Mr. Icahn’s gift may be to stimulate change rather than actually take over the firm.