Updated August 13, 2008

Novolipetsk Steel (NLMK) (its core beneficiary is Vladimir Lisin which controls about 85% stocks) declared about a purchase of the US pipe and tube products manufacturer John Maneely Company (JMC) from a stockholders’ group that lists the private equity fund Carlyle Group and the Zekelman family. The deal sum totals $3,53 billion.

The overall deal’s price presupposes that the purchased company balance sheet is free from debt obligations and free cash, NLMK’s press release says. The core trade union of the industry – United Steelworkers – has approved the deal, but it should be approved by the regulatory bodies as well. The deal is expected to close in 4Q 2008. NLMK will finance the deal by means of the borrowed resources, including the attracted syndicated loan of $1,6 billion, as well as a bridge financing of $2 billion provided by such banks as Merrill Lynch, Deutsche Bank and Societe Generale. "We consider the deal sum as sound. The company is nonpublic, and in our opinion, it is a reason for a 16% discount", BrokerCreditService Investment Company analysts Oleg Petropavlovsky marked.

JMC is the largest independent pipe and tube products manufacturer in North America with the most diverse sales platform among the North-American manufacturers. JMC roots date back to December, 2006, when the company was established as a result of John Maneely Company and Atlas Tube amalgamation. JMC’s headquarters is located in Beachwood, Ohio, and it is a group of 11 manufacturing assets in five states of the USA and in Canada with the total production capacity of more than 3 million tons of steel pipes and tubes per year. Within the 12 months period ended on June 30, 2008, JMC sold 2,1 million tons of pipes and tubes. The company’s revenue totaled $2,4 billion for this period, and EBITDA ratio attained $485 million. The company manufacturing divisions, Wheatland Tube and Atlas Tube, provide JMC with the leading positions in each of the three core categories of the products it produces: hollow sections for structural units, electric weld pipes and electrical conduit. During the period when JMC belonged to the Carlyle’s portfolio, the company revenue grew by $800 million (36%), from $2,2 billion in 2006 to about $3 billion in the current year.

"The purchase of JMC corresponds to NLMK’s strategy directed to development of the vertical integration of the company assets and the capacities’ increase of the end products’ production on the key markets. This deal strengthens NLMK’s positions at the North-American market and provides an entry to high profit end market", is marked in the report of Russia’s metallurgical giant.

"Despite high international competition level, the high skilled team of JMC’s managers has built the global pipe and tube company. They managed to establish economies of scale by means of realization of two strategic acquisitions, to optimize the manufacture process due to the launch of flexible manufacturing system and management of Six Sigma quality, as well as to increase sales due to intense attitude to customers’ needs. At many enterprises, the company personnel have enjoined the benefits of these changes due to participation in motivational programs. We are sure that NLMK is the right company to continue JMC’s tradition of quality and innovations and to take it to the new stage of development", Daniel A. Pryor, managing director of Carlyle industry department, said.

It is not the first NLMK’s asset in the USA. NLMK, within the framework of the joint venture with Duferco Group, owns two manufactures in the United States – Duferco Farrell Corp. and Sharon Coating LLC. Duferco Farrell is one of the core suppliers of hot rolled steel to JMC and the largest supplier to Wheatland Tube, JMC’s division, as its enterprises are closely located to Duferco Farrell, is marked in the Russian company’s press service. Therefore, the deal of JMC purchase permits NLMK to get a synergetic benefit (nearly $35 million a year) from the vertical integration of Duferco Farrell and JMC’s enterprises. This really coincides with the strategy of Vladimir Lisin that gradually expands the products output with the high value added, and they are realized at the developed markets. This exactly was the reason of NLMK’s purchase of the Danish rolling company DanSteel and establishment of the joint venture with Duferco Group. NLMK supplies slabs to its plants in Europe and Duferco’s enterprises (in Italy, France, Belgium and the USA), and a revenue from produced and sold hot dip galvanized plates and pre-painted galvanized plates is shared according to the participation stakes of the partners. NLMK and Duferco were attacking the US galvanized steel market through the local company – Winner Steel – they had purchased recently.

The American company’s purchase will insignificantly affect NLMK’ indices, Veles Capital Investment Company analyst Stanislav Phomenko marks. "It is a perspective purchase in the long-term prospect", Phomenko adds. "It is a vertical diversification, an entry to the new markets. However, in the nearest future the new asset will demand some costs to make it more efficient, so it will fit into the general structure of NLMK. Now, one has to decide the matters with suppliers for JMC, and deal with the management".