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After losing National bid, AK Steel may be target
Monday June 16, 3:43 pm ET
By Michael Erman

NEW YORK, June 16 (Reuters) - The tables have quickly turned on AK Steel.

After losing its bid for National Steel Corp. (OTC BB:NSTLB.OB - News) when rival United States Steel Corp. (NYSE:X - News) secured a crucial pact with the steelworkers union in April, AK Steel Holding Corp. (NYSE:AKS - News) is now seen by industry watchers as a potential takeover target.

Possible suitors for the company, a maker of carbon, stainless and electrical steel for the automotive, construction, and other industries, include France's Arcelor (Paris:CELR.PA - News), Germany's ThyssenKrupp (XETRA:TKAG.DE - News), Brazil's Companhia Siderurgica de Tubarao (CST) (Sao Paolo:CSTB3.SA - News), and U.S. Steel, analysts and investors say.

AK Steel's shares are a "pretty good value", said Derek Dobecki, an analyst at Ironwood Capital Management, which owned about 1.5 million shares of the steelmaker at the end of March, according to Thomson Financial ShareWatch.

The failed acquisition attempt, as well as the effects of pension costs and cheap imports, have driven AK Steel's stock price down to historically low levels of about $3 per share. US Steel, by comparison, is trading for nearly $17 per share.

Before making its first bid for National in January, AK Steel's shares were trading at $7.60.

Longbow Research analyst Chris Olin said the company could be attractive to foreign investors looking for a beachhead in the U.S. steel market.

"It's a great entry point (for a foreign steel maker) because you get the large automotive exposure," Olin said. He said another bonus would be AK Steel's excess capacity to process semifinished steel, noting that a buyer could ship its extra product to be completed in AK's mills.

ThyssenKrupp said it was not interested in AK Steel, noting that it is looking to expand in the United States, but not on the production side. U.S. Steel and Arcelor declined to comment, and CST was not available for comment.

AK Steel declined to comment on its strategy.


AK Steel has reported two straight quarterly losses due to industry-wide problems, including weak demand and surging retiree health care and pension costs, known as "legacy costs."

Analysts expect AK's losses to continue through the third quarter of 2004, despite its reputation as a low-cost operator and its place as a market leader in operating profit per ton of steel since 1994.

Labor issues have become increasingly important in an industry in which more than 30 steel makers have filed for bankruptcy protection since 1997.

Many of the firm's competitors have secured new contracts with the United Steelworkers of America (News - Websites). However, AK Steel has an acrimonious relationship with the union, partly because of a three-year lockout of USWA workers at an Ohio plant, which ended in December.

Some analysts have questioned AK Steel's ability to compete now that International Steel Group and U.S. Steel, both larger than AK, have lowered labor costs.

But others think AK has advantages over larger players.

"They've got some preestablished relationships that make them a 'most favored nation' supplier. So, I don't think they will necessarily get bulldozed tomorrow," said Lawrence Creatura, a portfolio manger at Clover Capital Management.

Creatura said AK Steel has more advanced technology and makes very high quality steel. Clover owned about 1.2 million shares of AK Steel at the end of March, according to ShareWatch.

Merrill Lynch analyst Daniel Roling said steel industry consolidation could help AK Steel.

"You'll have fewer, bigger, better-disciplined companies, which means everybody is going to be better off on the producers side," said Roling.

Creatura thinks the industry's consolidation will continue and that AK Steel will be part of it.

"To stand still probably isn't an option for them," he said. "AK Steel will be acquiring or will be acquired."

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