The Bluescope (ASX: BSL) board has unanimously rejected a takeover proposal of $30 per share from an Australian and US consortium comprising Seven Group Holdings and Steel Dynamics.
Why it matters: We are not surprised by the rejection. Bluescope rebuffed prior approaches, and the board has made it clear it thinks the offer undervalues the company, including its land bank and future returns on current organizational and capital projects.
- The bid was Steel Dynamics’ fourth offer in 18 months, but the first with SGH. The two have entered a 12-month exclusivity agreement and invested resources, informing our confidence that a further offer is possible. We think the market agrees, with shares trading close to the failed bid price.
The bottom line: We’ve taken a closer look at our tariff assumptions and Bluescope’s land bank, raising our fair value estimate for no-moat Bluescope by 8% to $27 from $25 previously, and our stand-alone fair value estimate by 21% to $24.00 from $19.80 previously.
- We now ascribe a 25% chance that US tariffs persist for longer. So, we lift our midcycle EBIT assumption for North Star by 10% to $745 million, from $680 million, to reflect this probability.
- Likewise, we consider the possibility of tariffs being implemented in Australia and apply a 25% probability weighting to our spreads from fiscal 2029. We assume tariffs land at 25% and lift our midcycle EBIT assumption for Australia by 4% to $595 million (from $570 million).
Between the lines: Bluescope has a large excess land portfolio. We think management’s valuation of up to $2.8 billion may be optimistic, as it assumes all land is residentially zoned and sells at the same price per hectare as its most recent sale in Dapto, near its Port Kembla plant.
- We assume a present value for the land of $1.1 billion, or $2.50 per share. About one-fifth of it is zoned residential, but we are not certain if or when the remaining 1,000 hectares will be zoned residential.
Raising our Bluescope valuation on tariff outlook and property portfolio
Over the past decade, BlueScope Steel has transitioned away from the highly contested global markets, where returns are generally poor. The company’s strategy is to run a cost-competitive steel business that underpins the profitability of its premium branded products. Serving the residential, nonresidential, and construction markets, key branded products include Colorbond, Truecore, Zincalume, and Lysaght.
In Australia and New Zealand, where BlueScope has been operating for almost 60 years, about half of sales volumes are value-added products. However, in Asia these products are nascent, and in the US they are emerging. The group is targeting sales growth in the US via a bolt-on acquisition of a coil coating company, the second largest of its kind in North America. While we commend the strategy, which has served the company well in its antipodean locations, we think it is likely to take time for value-added products to become a meaningful contributor in the US. Our midcycle segment forecast includes only a small operating margin and revenue uplift from value-added sales.
The group’s Ohio-based North Star operations are the crown jewel. North Star specializes in the production of flat steel products for US customers in the automotive, nonresidential, and manufacturing sectors. The business operates efficient electric arc furnace-based capacity, which produces steel at a relatively low cost per unit. North Star demonstrates industry-leading operating margins and operates at a nearly full utilization rate.
BlueScope has gradually expanded production capacity at North Star to capture a greater share of demand and to reduce unit costs to maximize returns. We estimate production ramping up to 3.4 million metric tons by fiscal 2028 from 2.7 million in fiscal 2024 as the company completes a series of small debottlenecking projects. The firm’s strategy is to direct most additional volumes to its higher-margin coil coating business.
Bulls say
- North Star is expected to sell additional volumes following its recent capacity expansion and should continue to operate with high utilization and high efficiency.
- Increased market adoption of BlueScope’s branded products helps increase the share of branded products in total sales and supports margins in Australian steel products.
- Capital investment and a strategic focus in coating capacity in the US should increase sales of higher-margin products in the region.
Bears say
- The addition of competing electric arc furnace-based steel capacity leads to a flattening in the North American steel cost curve, reducing North Star margins.
- Automotive, nonresidential, and manufacturing activity could soften, thereby reducing demand for BlueScope’s products and services in the US.
- BlueScope is exposed to cyclicality, and demand is sensitive to construction activity.
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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.