Brookfield Asset Set To Benefit From Stelco Deal

With an estimated initial cost per share of less than C$6, Brookfield Asset Management Inc. (BAM) stands to make a healthy profit now that Stelco Inc. (STE/TSX) finally got a buyer in United States Steel Corp. (X).

U.S. Steel is paying C$38.50 per share for the Hamilton, Ontario-based steelmaker. BAM’s Tricap I Restructuring Fund, meanwhile, owns roughly 9.9 million Stelco common shares and a modest amount of warrants, according to RBC Capital Markets analyst Neil Downey, who reminded clients in a note of Tricap’s integral role in Stelco’s financial restructuring and recapitalization in 2005 and early 2006.

However, since acquiring the shares immediately after Stelco’s restructuring, the company’s losses may have pushed Tricap’s carrying value per share toward zero, Mr. Downey said.

Nonetheless, BAM’s 48% investment in the fund means it could gain more than C$200-million, or more than C33¢ per share, when the deal is completed later this year, the analyst estimated. He also pointed to incentive fees that BAM could generate, although they may or may not be recognized when the transaction closes.

“Overall, it now appears that the participation in the Stelco restructuring process will yield an exceptional return on capital for BAM and its investment partners,” Mr. Downey said.

He rates Brookfield at “sector perform” with a C$40 price target, representing upside of roughly 7%.

BAM 1-yr chart: