Saturday, August 28, 1999

Feds OK Armco, AK Steel melding

Prospects bright for Middletown

The Cincinnati Enquirer

        The Justice Department gave the green light Friday to AK Steel's $1.3 billion acquisition of Armco Inc., a deal reuniting two halves of the steel company started in Middletown almost a century ago.

        The merger, slated for completion at the end of September, would double AK Steel's revenues and employment. It also would give it a much higher profile in the faster growing and more profitable stainless-steel market.

        The combination is expected to be a plus for the city of Middletown, where George M. Verity founded the American Rolling Mill Co., which later became Armco, in 1900. In 1989, Armco spun off its Middletown flat-rolled carbon steel business into a joint venture with Kawasaki Steel Corp., which was reorganized as AK Steel in 1994.

        The combined companies, which will be known as AK Steel, will be based in Middletown, but company officials say it is too soon to say what impact the merger will have on AK Steel's corporate offices.

        “Our organizational plans are still being developed,” spokesman Alan McCoy said.

        The acquisition probably won't have a dramatic immediate impact on AK's headquarters, which now employs about 200 in Middletown. Armco, which moved its headquarters first to New Jersey and then to Pittsburgh after moving from Middletown in 1985, has a corporate staff of fewer than 80.

        Before the acquisition was announced in May, Armco had plans to move its offices from downtown to suburban Pittsburgh, but that move is now on hold, a spokesman said.

        Nevertheless, community leaders think Middletown will benefit.

        “Overall, I think (the acquisition) is a big plus for AK Steel,” said David Daugherty, president of the Mid-Miami Valley Chamber of Commerce.

        “It's an important acquisition. It shows the strength of AK Steel and should solidify its future. It's got to be good for Middletown.”

        Ed Shelley, president of the Armco Employees Independent Federation (AEIF), the union representing 3,100 AK Steel employees, said the acquisition should benefit his members.

        “The deal will help AK Steel produce higher dollar-value steel,” he said. “That will help the company and workers in the long run.”

        As part of its approval of the acquisition, the Justice Department said AK Steel agreed to license patents to manufacture and sell aluminized stainless steel to Wheeling-Nisshin Inc.

        The Justice Department originally raised concerns that AK Steel's acquisition of Armco would lessen competition in the United States for aluminum-coated stainless steel, used mainly in automobile exhaust systems.

        AK Steel is now the sole U.S. producer of aluminum-coated stainless steel, producing about 70,000 tons annually. But Armco also retained patent rights for the product and was negotiating a license with Wheeling-Nisshin to make the product before the merger with AK Steel was announced.

        Shareholders of both AK Steel and Armco are to vote on the acquisition Sept. 29. The deal would value Armco shares at $7.50 each in an exchange of stock, subject to certain conditions. Friday, Armco shares closed at $6.75, up 121/2 cents; AK closed at $20.371/2, down 561/4 cents.

        Wall Street analysts have been bullish on the deal.

        Unlike other integrated steel makers, AK Steel has focused on producing more profitable hot-rolled and coated steels, primarily for the automotive industry.

        Last year, AK Steel's operating profit of $46 a ton, a key industry measure, was about 21/2 times the industry average.

        Analysts think the Armco acquisition will accelerate AK Steel's move to more profitable steel products.

        AK Steel's merger with Armco, combined with its new Rockport, Ind., finishing mill “will allow the company to further expand its focus to include the higher growth specialty steel business,” Kurt Billick, steel analyst with Warburg Dillon Read, wrote in a report this week.

        Mr. Billick said stainless steel demand is expected to grow at a 4.7 percent annual rate in the next five years vs. about 2.3 percent for carbon steel.

        Mr. Billick said the only question marks surrounding the Armco merger are whether AK Steel can produce the cost savings estimated at more than $100 million from the acquisition and whether competition from other steel makers will erode the higher profit margins from specialty steel.

        A look at AK Steel after its planned acquisition of Armco Inc. is completed:

        • Headquarters: Middletown.

        • Employment: 11,500.

        • Revenues: $4.1 billion.

        • CEO: Richard M. Wardrop Jr.

        • Operations: AK Steel, a leading flat-rolled steel maker, has plants in Middletown, Ashland, Ky., and Rockport, Ind. Armco, a producer of stainless and electrical steels, has plants in Butler, Pa., and Coshocton, Dover, Mansfield and Zanesville, Ohio.


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