Thursday, September 23, 1999

AK Steel's falling shares affect deal

More needed to buy Armco

The Cincinnati Enquirer

        AK Steel's slumping stock price has forced the Middletown steel maker to increase the number of shares it will use to buy its one-time parent Armco Inc.

        AK Steel Wednesday said it would pay 41.6 million of its shares, about 9.6 million more than its original stock-swap agreement, to acquire Armco, a Pittsburgh-based specialty steel maker.

        AK Steel said that as a result of the additional shares, it now expects the merger, reuniting two steel companies started in Middletown in 1900, to slightly dilute earnings in the first year. Previously, AK Steel said the deal would add slightly to earnings in the first year.

        Some analysts said the change wasn't significant.

        Waldo Best, steel analyst with Morgan Stanley Dean Witter, said he was maintaining an “outperform” rating on AK Steel's stock.

        The move to sweeten the merger terms was triggered by the drop in AK Steel's shares since the $1.3 billion merger was announced. When the deal was announced May 21, AK Steel's shares closed at $22.371/2, but Wednesday, its shares closed at $17.50, down 871/2 cents on the day.

        Under terms of the purchase agreement, Armco could terminate the agreement if the average price of AK Steel's shares fell below $22 a share in the 10 days ending Tuesday.

        AK Steel's average share price for the period was $19.59, triggering Armco's termination notice. AK Steel, which had until Friday to increase the exchange ratio of its shares for Armco's, subsequently announced that it was increasing the exchange ratio to 0.3829 of its shares for each Armco share from the original ratio of 0.2836.

        Although AK Steel has been one of the steel industry's most profitable performers in recent years, analysts said several factors have fueled a slump in its stock price.

        Michael Michalisin, analyst with Deutsche Banc Alex Brown, said earnings expecta

        tions for AK Steel for the current quarter have recently been reduced because of costs associated with an annual blast furnace maintenance shutdown at the company's Ashland, Ky., mill and additional costs associated with the Armco merger, slated to be completed late next week.

        Mr. Michalisin, who previously cut his third-quarter earnings estimate for AK Steel from about 38 cents a share to 21 cents a share, said, “I think the earnings concerns are overdone. At $17 and change, the stock is an outstanding value.”

        The consensus estimate among analysts surveyed by First Call is that AK Steel will report operating earnings of 27 cents a share in the current quarter, Mr. Michalisin said.

        Mr. Best, who also likes AK Steel's stock, said the AK Steel-Armco stock swap itself is fueling some of AK Steel's price decline as Wall Street arbitrageurs have been simultaneously selling AK shares and buying Armco stock to lock in the difference in price.


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