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AK Steel’s stock jumps after $1.1 billion buyout deal with Cleveland-Cliffs

Shares of AK Steel Holding Corp. rallied Tuesday, after the steel maker agreed to be bought out by iron ore mining company Cleveland-Cliffs Inc. in an all-stock deal valued at $1.1 billion.

Gains were pared, however, as the tumble Cleveland-Cliffs’s stock effectively lowered the buyout bid’s premium to under 4% from about 16%.

Under terms of the deal, which is expected to close in the first half of 2020, AK Steel shareholders will receive 0.40 shares of Cleveland-Cliffs common stock for each AK Steel share they own.

Based on Monday’s stock closing prices of $2.89 for AK Steel and $8.41 for Cleveland-Cliffs, the deal values AK Steel shares at $3.36, or a 16% premium. That implies a market capitalization for AK Steel of about $1.06 billion. Cleveland-Cliffs had a market cap of $2.27 billion on Monday.

AK Steel shares AKS, +3.29% rallied 4.8% in afternoon trading, paring earlier gains of as much as 6.9%, while Cleveland-Cliffs’ stock CLF, -11.77% tumbled 10.9%.

At current premarket prices, the deal would value AK Steel stock at about $3.00, which is 3.7% above Monday’s closing price.

All-stock deals often cause the acquiring company’s shares to fall, as issuing new stock to fund the acquisition would dilute shareholder value.

The merger announcement comes a day after President Donald Trump gave a boost to shares of steel producers, by saying he was bringing back tariffs on steel imports from Brazil and Argentina, as retaliation for currency devaluations. AK Steel shares ran up 4.7% on Monday and Cleveland-Cliffs’ stock climbed 5.3%.

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Cleveland-Cliffs shareholders will own 68% of the combined company, which will be led by current Cleveland-Cliffs Chairman and Chief Executive Lourenco Goncalves. AK Steel Chief Executive Roger Newport will retire.

“For Cliffs, we expect to realize immediate growth and a long-desired objective of a more diverse customer base, as well as more predictable cash flow generation due to the contracted nature of AK Steel’s sales of high-end automotive steel,” Goncalves said in a statement.

The companies expect the combination to generate about $120 million in cost synergies per year, which are expected to be realized within the first 12 months after closing, primarily from consolidating corporate functions, eliminating duplicate overhead costs, energy cost savings and supply chain efficiencies.

“The combination of Cliffs’ iron ore pellet capabilities and our innovative, high-quality steel product development and production is strategically compelling,” AK Steel Chief Executive Roger Newport said. “Together, we expect to be able to take advantage of growth opportunities faster and more fully than either company could on its own.”

As the deal is completed, three existing members of AK Steel’s current board of directors will join Cleveland-Cliffs board, while two current Cleveland-Cliffs board members will step down. The combined company will be headquartered in Cleveland, but a “significant presence” will be maintained at AK Steel’s current headquarters in West Chester, Ohio.

AK Steel’s stock has soared 46.4% over the past three months, but has lost 7.1% over the past 12 months, while Cleveland-Cliffs shares have lost 22.0% the past year and the S&P 500 index SPX, -0.99% has advanced 10.7% the past year.