Algoma resolves hedge fund fight

Date: Wednesday, March 8, 2006
Author: GREG KEENAN- Globe & Mail

Algoma Steel Inc. ended a nasty battle with a New York hedge fund yesterday by agreeing to pay a $200-million special dividend, appoint new directors and continue to pursue a potential sale or merger.

The truce with Paulson & Co. Inc., announced late yesterday, means Algoma's largest shareholder has withdrawn its request for a special meeting of shareholders, where it sought to throw out most of the steel maker's board.

The deal came together during the past two days, sources said, when Algoma executives were in New York meeting with investors and paid a visit to Paulson's head office.

The steel company, Canada's third-largest integrated producer, said it reached "a greater level of certainty" about its future cash position amid declining natural gas prices, the growing prospect for moderate increases in iron ore prices this year -- instead of jumps in the 75-per-cent range -- and the current and short-term outlook for steel prices.

"We are pleased to have alignment on the strategic direction of Algoma and look forward to focusing on building a stronger company," Algoma chairman Ben Duster said in a statement.

Paulson holds 19 per cent of Algoma and was pushing for a special payout of $420-million that included Algoma taking on $200-million in new debt. The hedge fund had requisitioned a special meeting of shareholders to elect a board that would agree to that plan.

Algoma fought the proposal, citing the uncertainty of steel markets and its own history of having been through restructuring under the Companies' Creditors Arrangement Act twice since 1990.

As recently as yesterday morning, Paulson was alerting reporters to a news conference in Toronto where it was going to outline its case ahead of the March 22 meeting.

Instead, the hedge fund's president, John Paulson, said the move is positive for shareholders.

"We also believe that greater value can be created by working constructively with Algoma's board," Mr. Paulson said in a statement.

The agreement will allow Algoma to focus on the big picture, instead of a special shareholder meeting looming later this month, said Michael Waldorf, Paulson's senior vice-president.

The special dividend amounts to about $5.15 a share, based on 38.6 million shares outstanding as of Dec. 31. It will be paid out by the end of the second quarter and is the second special dividend in the past year.

Total distributions to shareholders amount to $476-million during that time.

Two new directors approved by both Algoma and Paulson will be appointed promptly. Algoma held cash and short-term investments of $434.8-million as of Dec. 31, and became debt-free in January after paying off U.S. dollar notes with an interest rate of 11 per cent.

The Sault Ste. Marie, Ont.-based company said it will need $150-million of cash on hand during the next 18 to 24 months and will work toward creating a capital structure of 25 per cent debt to total capital.

Algoma will also continue with a strategic review of the company's options, which includes its sale, merger or acquisition or more distributions of excess capital.

The steel maker pulled itself off the auction block in August, but noted in a presentation to investors posted on its website yesterday that it re-engaged potential suitors last November and has "several parties" in its data room with some performing on-site due diligence.

"This will remain an ongoing process to ensure the maximization of shareholder value," the presentation said.

The potential sale of the company comes amid a global steel industry consolidation.