Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
We caution readers that our business activities involve risks and uncertainties that could cause actual results to differ materially from those currently expected by management. We described the most significant risks that could impact our results in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023, and the additional risk factors presented below update and supplement that disclosure.
RISKS RELATED TO THE STELCO ACQUISITION
The Arrangement Agreement may be terminated in accordance with its terms and the Stelco Acquisition may not be completed.
The Arrangement Agreement contains a number of customary conditions that must be satisfied or waived before the Stelco Acquisition can be completed. These conditions include, among others:
• the approval of the Stelco Acquisition by the requisite vote of the shareholders of Stelco;
• the receipt from the Ontario Superior Court of Justice of an interim order and a final order approving the Stelco Acquisition;
• the receipt of required regulatory approvals and clearances in the U.S. and Canada, including under each of the Investment Canada Act (Canada), the Competition Act (Canada) and the Hart-Scott-Rodino Antitrust Improvements Act of 1976; and
• the approval by the Canadian Minister of Innovation, Science and Industry under the strategic innovation fund agreement to which Stelco is a party.
These conditions to the closing of the Stelco Acquisition may not be fulfilled in a timely manner or at all, and, accordingly, the Stelco Acquisition may be delayed or may not be completed.
In addition, if the Stelco Acquisition is not completed by April 14, 2025 (subject to the parties being entitled to extend the date to May 29, 2025 and then July 14, 2025 if required regulatory and other governmental approvals have not yet been obtained or there is a legal impediment to closing), either party may choose not to proceed with the Stelco Acquisition. The parties can mutually decide to terminate the Arrangement Agreement at any time, before or after receipt of Stelco shareholder approval.
In addition, if the Arrangement Agreement is terminated under certain circumstances relating to the failure to obtain regulatory approvals in a timely manner, we may be required to pay Stelco a CAD$131 million termination fee.
Following completion of the Stelco Acquisition, our debt may limit our financial flexibility.
As of June 30, 2024, we had approximately $3.5 billion of outstanding indebtedness, including amounts drawn under our ABL Facility. We expect to incur and/or assume $2.25-$2.75 billion of debt to complete the Stelco Acquisition. Immediately following completion of the Stelco Acquisition, we expect to have $6.0-$6.5 billion of outstanding indebtedness. In addition, in connection with entering into the Arrangement Agreement, we obtained commitments to provide debt financing in an amount sufficient to pay the cash portion of the consideration for the Stelco Acquisition and to repay Stelco's outstanding indebtedness, including under its revolving credit facility and its inventory monetization agreement. Although the receipt of such financing is not a condition to the closing under the Arrangement Agreement, the unavailability of such financing could adversely impact our ability to pay the cash portion of the consideration to Stelco's shareholders and adversely affect the financial condition and liquidity of the combined company following the closing. While we have entered into certain currency hedging transactions to mitigate our foreign exchange exposure on a portion of the cash consideration, adverse changes in exchange rates could effectively increase the amount of cash needed to fund the cash consideration payable to Stelco shareholders, which may require us to incur additional debt. Any increase in our indebtedness could have adverse effects on our financial condition and results of operations, including requiring us to dedicate a substantial portion of our cash flow from operations to pay our debt, thereby reducing funds available for working capital, capital expenditures, future acquisitions, share repurchases and other purposes.
38
Table of Contents
The Stelco Acquisition may be less accretive than expected, or may be dilutive, to our earnings per share, which may negatively affect the market price of our common shares.
The Stelco Acquisition may be less accretive than expected, or may be dilutive, to our earnings per share, which could cause the price of our common shares to decline. Estimates of our future earnings per share are based on preliminary estimates that may materially change. In addition, future events and conditions could decrease or delay any accretion or result in dilution, including, among others:
• adverse changes in market conditions and general economic conditions;
• reduced production levels or disruptions to operating performance;
• higher than expected integration costs or lower than expected synergies realization; and
• adverse changes to the value or timing of liabilities and capital expenditure obligations we would assume in connection with the Stelco Acquisition.
In addition, we expect to issue approximately 26 million of our common shares to Stelco shareholders as part of the Stelco Acquisition (including in respect of shares underlying Stelco equity awards expected to be outstanding at the closing). Following their receipt of our common shares at the closing, former Stelco shareholders may seek to sell our common shares delivered to them. These or other sales, coupled with the increase in the aggregate outstanding number of our common shares, may affect the market for, and the market price of, our common shares in an adverse manner.
Completion of the Stelco Acquisition may trigger change in control or other provisions in certain agreements to which Stelco is a party.
The completion of the Stelco Acquisition may trigger change in control or other provisions in certain agreements to which Stelco is a party and to which the combined company will be subject following the closing, including the strategic innovation fund agreement with the government of Canada to which Stelco is a party. If we are unable to obtain consents to the Stelco Acquisition from the counterparties or negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, which may include terminating the agreements, claiming monetary damages or seeking to enjoin the Stelco Acquisition. Even if we are able to obtain consents or negotiate waivers, the counterparties may require consideration for granting such consents or waivers or seek to renegotiate the agreements on terms less favorable to us.
Even if we complete the proposed Stelco Acquisition, we may fail to realize all of the anticipated benefits of the Stelco Acquisition, and our integration of Stelco may not be as successful as anticipated.
The anticipated benefits of the Stelco Acquisition may not be realized fully or at all, may take longer to realize than expected, may require more non-recurring costs and expenditures to realize than expected or could have other adverse effects that we do not currently foresee. In addition, there could be potential unknown liabilities and unforeseen expenses associated with the Stelco Acquisition and/or Stelco's business that were not disclosed to us or discovered in the course of carrying out our due diligence review, and potentially burdensome regulatory conditions could be required of us in order to complete the Stelco Acquisition. Difficulties in integrating Stelco may result in the combined company performing differently than expected, in operational challenges or in the failure to realize anticipated expense-related efficiencies. Our and Stelco's existing businesses could also be negatively impacted by the Stelco Acquisition if we are unable to retain key employees and successfully preserve and integrate relationships with customers, vendors and other business partners.
Following completion of the Stelco Acquisition, we may record tangible and intangible assets, including goodwill, that could become impaired and result in material non-cash charges to our results of operations in the future.
The Stelco Acquisition will be accounted for as an acquisition by us in accordance with GAAP. Under the acquisition method of accounting, the total purchase price will be allocated to Stelco's tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date of completion of the Stelco Acquisition. The excess, if any, of the purchase price over those fair values will be recorded as goodwill. To the extent the value of tangible or intangible assets, including goodwill, becomes impaired, we may be required to incur material non-cash charges relating to such impairment. Our operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment.
The Company, Stelco or their respective directors and officers may be targets of securities class action and derivative lawsuits that could result in substantial costs and may delay completion of the Stelco Acquisition.
Securities class action lawsuits and derivative lawsuits are often brought against public companies and their directors and officers when companies enter into agreements for transactions similar to those contemplated by the Arrangement Agreement, and such lawsuits may be brought against the Company, Stelco or their respective directors and officers in connection with the Arrangement Agreement. If a plaintiff is successful in obtaining an adverse judgment or an injunction, that may delay completion of, or increase the cost to complete, the Stelco Acquisition, which may adversely affect our business, financial position and results of operations. Currently, we are not aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Stelco Acquisition.
39
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.