Iconic Canadian steel manufacturer combines with Legato Merger Corp.
The re-emergence of iconic Canadian steel manufacturer Algoma Steel as a publicly traded company in the coming months is the result of using a Special Purpose Acquisition Corporation vehicle that is more efficient and speedier than a regular IPO, say the Goodmans LLP lawyers who worked on the deal.
Last week, the Canadian parent company of privately held Algoma, located in Sault Ste. Marie, Ontario, announced a deal with Legato Merger Corp., a U.S.-based SPAC that trades on the NYSE. Algoma also intends to apply to list its common shares on the Toronto Stock Exchange.
The all-stock transaction implies a pro forma enterprise value of more than US $1.3 billion for Algoma, which has a storied history of more than a century and is the largest employer Sault Ste. Marie.
“This is a positive transaction for the company, a positive transaction for current stakeholders, and for future shareholders,” says Robert Chadwick, who was Algoma’s lead counsel on the deal for Goodmans. But he wants to clarify that this is an interim step in the company’s growth plans and not part of an exit strategy for current Algoma shareholders.
“The goal of this transaction is not a shareholder exit at this time, the goal of this transaction is to continue to improve the company.”
The deal, done with the added challenges of travel restrictions and social distancing rules, hasn’t closed yet, and there are many steps ahead, but Chadwick estimates the deal should close in late summer or early fall.
The steel producer was founded in 1902 by Francis Clergue, an American entrepreneur who had settled in Sault Ste. Marie. The 119-year-old company struggled through years of court-supervised restructuring before emerging as a private company in 2018. It last traded on public markets in 2007, just before India’s Essar Global Ltd. acquired it for US$ 1.63 billion.
Chadwick says the company has had a strong relationship with the company, now owned by Essar and several creditors and debt holders, involved in the company’s last restructuring.
When the company decided it needed a capital infusion to continue to keep up and grow in a very capital-intensive sector, there were several options available, he says, including a sale or going public through an IPO.
Given the recent upturn in the steel industry and steel prices, Chadwick notes this is a good time for Algoma to be seeking additional capital through an investor. “It’s always good to have cash, especially in the steel industry, which has its cyclical ups and downs.”
Michael Royal, a tax lawyer with Goodmans who worked on the deal, says that as a native of “The Soo,” he is pleased that the company’s next iteration will be a publicly-traded company.
“I’m not overstating that fact that Algoma is the heart of the city,” he says. “Most people work or have worked there or has a family member who has worked there at some point. It’s great to see a transaction that will allow for the company to keep improving, to remain the backbone of a city in Northern Ontario.”
As a publicly traded company, Algoma will continue under the leadership of its current management, with a Board of Directors that will include six directors designated by Algoma, three directors appointed by Legato and one jointly nominated.
Algoma CEO Michael McQuade says the proposed merger will “provide Algoma with investment capital and an enhanced capital structure to support further transformative investments that are expected to drive improved financial performance and sustainable returns through the steel pricing cycle.”
Algoma would have access to about US $236 million held in Legato’s trust account, which Algoma would have access to as part of its growth strategy.
Various investors have also committed to participate in the transaction through a private investment in public equity deal (PIPE) that would inject about US $100 million at US $10 a share. A PIPE refers to the practice of private investors buying a publicly traded stock at a price below the current price available to the public.
The PIPE includes significant investments from strategic steel industry participants and investments from Legato’s Chairman, TD Wealth Management, Vantage Asset Management, JC Clark, Hite and Goodwood Fund.
Michael Partridge, another Goodmans M&A lawyer who worked on this deal, said that while different scenarios were considered, it was decided the two significant advantages of a SPAC deal are “speed of execution and certainty.”
A SPAC, also known as a “blank cheque” company, is a vehicle put together by investors looking for the ideal appropriate company in which to invest. Other investors investing in the SPAC can redeem their investment if they aren’t interested in the particular deal.
Because it is already a listed entity, it is easier to have the acquired company go public. As well, Partridge says, there is certainty in knowing how much capital is raised. There is less marketing needed and no concerns over the need to reprice an IPO because the expected investor uptake didn’t happen.
“You’re essentially de-risking the offering by going the SPAC route,” he says. The Legato investment amounts to about a 20 per cent dilution in the company’s shares.
Chadwick also makes the point that most creators of SPACs are experienced investors with a strong track record. They may take time if finding the right company to invest in, he says, but they are also very good at doing their due diligence, which generally means other investors who join the SPAC trust their ideas.
Partridge adds it’s a validation of Algoma’s potential that Legato and Crescendo Partners did their homework and chose the steel manufacturer, as many SPACs recently have involved tech companies or those with an environmental component.
Crescendo, founded by US activist investor Eric Rosenfeld, has done several successful deals in Canada. They include beverage maker Cott Corp., Canadian construction firm Aecon Group Inc. and aerospace manufacturer Spar Aerospace Ltd. In the past, a common playbook for Crescendo included taking up minority stakes in firms, gaining board positions, and pushing for management change. More recently, Crescendo has been involved in SPACs.
Rosenfeld, also Legato’s Chief SPAC Officer says "we believe that Algoma’s transformation and potential investments will allow Legato stockholders to participate in a significant value creation opportunity.
Royal says that a cross-border deal such as the Algoma-Legato merger has its challenges from a tax perspective. While somewhat complex, he says, "it’s more a matter of making sure there is a good understanding of the tax laws in jurisdictions on both sides of the border." He adds a deal structure should be the "most tax efficient possible.”.
The three lawyers say that the financial aspects of the deal – balance sheet, synergies, valuation – are dealt with by the investment bankers on mergers such as this. Still, lawyers are there to look at many of the other essential details. These include corporate tax, financing, corporate governance, and looking at the details of an agreement to ensure the client’s interests are protected.
Says Chadwick: “It is really a combination of working together with the investment bankers, frm a financial perspective and from a legal perspective.”
