United Steelworkers union says in court filings that it sees no chance of reaching an deal with KPS on a new collective agreement.Kenneth Armstrong/The Globe and Mail
Key stakeholders of Essar Steel Algoma Inc. are pursuing a multi-pronged effort to block the purchase of the steel maker by a New York-based private equity fund and a group of lenders.
Holders of Essar Algoma's junior and senior notes, the United Steelworkers (USW) union and the port of Algoma are urging the Ontario Superior Court to halt a bid by KPS Capital Partners LP, which is seeking approval by the same court of a purchase agreement it has signed with the Sault Ste. Marie, Ont.-based company.
The battle over the combined bid by KPS and its debtor-in-possession (DIP) lending group, which is conditional on agreements with the USW and the Ontario government, comes as the steel maker approaches an Aug. 31 deadline for the conclusion of a sales process and a looming cash outflow to pay for purchases of iron and coal that need to be stockpiled before the winter freeze-up prevents shipments of raw materials. The Aug. 31 deadline is a requirement contained in the DIP agreement.
The union says in court filings that it sees no chance of reaching an deal with KPS on a new collective agreement and instead says it has reached a deal with Essar Algoma's former parent company, Essar Global, on a $903-million (U.S.) bid to buy the company. A previous bid by Essar Global has already been tossed out by the Ontario Superior Court after the court-appointed monitor said it lacked financing.
The union also says it reached a deal with Bedrock Industries Group LLC, another private equity fund, to provide replacement DIP financing.
Bedrock and KPS are also competing to buy U.S. Steel Canada Inc., which like Essar Steel, is operating under protection of the Companies' Creditors Arrangement Act and is also for sale after having been cut loose by its parent United States Steel Corp. last fall.
While Essar Global has been bidding to buy back the company it placed in CCAA protection last fall and to buy U.S. Steel Canada, its Essar Steel Minnesota unit, an iron ore processing development, went into protection under Chapter 11 of the U.S. Bankruptcy Code last week.
To further complicate matters, in the Canadian court proceeding, a member of the Essar Algoma special committee that was set up to examine bids for the company said in a court filing that the steel maker has rejected two offers of new debtor-in-possession financing, contradicting a statement by the company that no worthwhile DIP financing proposals had emerged in the sales process.
Senior secured note holders are proposing an alternative restructuring plan.
But the key hurdle for KPS will be overcoming the objections of the USW, which sources involved in the Essar Algoma restructuring said effectively has a veto because the KPS deal is conditional on a new collective agreement.
"I see no reasonable prospect of the USW reaching an agreement with the hedge fund bidder [KPS] that the USW could recommend to its members," Tony DePaulo, an assistant to USW District 6 director Marty Warren, said in a court filing.
KPS has said it will not assume the liabilities of Essar Algoma's defined-benefit pension plan, which amount to more than $300-million (Canadian). That could leave thousands of retired USW members facing major reductions in their pension benefits.
"The hedge fund bid … purposes to shift a tremendous amount of value from USW's active members and retirees in Sault Ste. Marie, Ont., to the participating hedge funds," Mr. DePaulo said in his court filing.
Essar Algoma said the KPS purchase would position the company with a secure capital structure that would enable it to weather the up-and-down cycles of the steel industry.