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Ontario court thwarts Essar Global’s bid for Essar Algoma a second time

A crucible once used to carry molten steel is seen outside the Essar Steel Algoma plant November 13, 2015 in Sault Ste.

Kenneth Armstrong/The Globe and Mail

The Ontario Superior Court has delivered a double setback to Essar Global Fund Ltd. as the India-based conglomerate tries to hang on to Essar Steel Algoma Inc.

Justice Frank Newbould has rejected a second attempt by Essar Global to make a bid for Essar Algoma, which is operating under the protection of the Companies' Creditors Arrangement Act.

Justice Newbould also deleted a change-of-control clause included in the 2014 sale of Essar Algoma's port operation to Essar Global that was believed to provide Essar Global with a veto over any bid to buy the company.

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Essar Algoma, based in Sault Ste. Marie, Ont., has been operating under CCAA protection since 2015 and has agreed to a buyout by a group of lenders – which the court has not yet approved – that is trying to reach a deal with union locals that represent salaried and hourly workers at the company's mill.

Allowing Essar Global back into the sales process "would be foolhardy," Justice Newbould wrote in a ruling denying Essar Global's motion to reopen the bidding for the steel maker. In an earlier attempt, Essar Global did not demonstrate that it had enough money to make a credible bid and there is still "no evidence that it has the financial resources," he said.

He was even more critical of the 2014 deal that involved Essar Algoma's sale of its port to Essar Global after a restructuring under which Essar Global agreed to inject $250-million to $300-million in cash into the steel company.

Essar Global did not live up to that commitment, but agreed to buy the port operations from Essar Algoma, which it controlled.

The change-of-control clause in the transaction gave Essar Global a veto over a potential buyer in the CCAA process, Justice Newbould ruled.

Elements of the deal, such as the change-of-control clause, "are harmful to a restructuring process and negatively impact creditors," he said, pointing to trade creditors, the City of Sault Ste. Marie, the steel-maker's pension funds and post-employment benefits for retirees. Those creditors are owed a combined $911.9-million.

The deal to buy the port assets constitutes oppression of those creditors, he ruled.

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"What happened in the port transaction was an exercise in self-dealing in that Algoma's critical port asset was transferred out of Algoma to a wholly owned subsidiary of Essar Global with a change-of-control provision that benefited Essar Global at a time that a future insolvency was a possibility," he wrote. "That would not have been necessary had Essar Global lived up to its cash injection commitment."

In a third ruling in the case, Justice Newbould has ordered the union locals, company representatives and the potential buyers to a mediation session later this month to try to work out a new labour agreement.

The United Steelworkers locals that represent the workers plan to appeal the order, in part because they are prevented from informing their members about what happens during mediation, local 2251, which represents hourly workers, said in a statement.

"Negotiating committees from time immemorial have been able to speak with their members," the local said.

Essar Global, controlled by the Ruia family of India, bought Algoma Steel Inc. for $1.85-billion in 2007 during a consolidation in the global steel industry.

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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