Cleveland-Cliffs (NYSE:CLF) will buy AK Steel (NYSE:AKS) for $1.1 billion. In effect, a steel company will own the iron ore mines. So, is this vertical integration a positive development for CLF stock? Cliffs bottomed at $6.75 in the last quarter and may potentially trade from $8 and above next.
Cliffs is buying a steel company as the metal and stock prices in this sector are at all-time lows. This could be an inflection point for CLF stock but the timing is somewhat of a guess.
The sector needs a US/China trade deal to help stabilize steel prices. Infrastructure spending increases in both countries will drive steel demand higher, lifting CLF stock, too.
Cliffs shifts from being a captive supplier to becoming a value-added steel producer. So, having a value-added producer that faces little competition will lead to improving profitability for the combined firm in the next few years.
The balance sheet will benefit from cost synergies that save ~$123 million. But CLF has a debt/equity of 5.8 times. AKS debt will strain the balance sheet. Still, AKS has debt that does not come due until 2024.
So, AKS will have time to either diversify away from the automotive industry (which is over 60% of the business) or to wait for that sector to rebound.
CLF shareholders initially reacted negatively to the deal. What it needs is a general uptick in markets to lift the stock, at least for the near-term.
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