Brookfield Asset Management to Take Over GrafTech International

GrafTech International Ltd. (NYSE:GTI) announced Monday that it’s entered into a definitive agreement and plan of merger with an affiliate of Brookfield Asset Management Inc. (TSX:BAM.A,NYSE:BAM). The deal will see Brookfield acquire all the outstanding shares of GrafTech common stock.

As quoted in the press release:

The definitive agreement was unanimously approved by GrafTech’s Board of Directors and follows the letter of intent announced by GrafTech on April 29, 2015. Holders of approximately 11% of the outstanding shares of GrafTechcommon stock, including GrafTech director Nathan Milikowsky, have agreed to support the transaction and tender their shares in the tender offer.

Under the terms of the agreement, Brookfield will commence a tender offer to purchase up to all of the outstanding shares of GrafTech common stock at a purchase price of $5.05 per share, representing a premium of 26% over the average closing price of the Company’s common shares during the 60 trading days ended April 28, 2015. The tender offer is not subject to any financing conditions.

The tender offer is intended to provide GrafTech stockholders the option to choose immediate liquidity at a premium as described above or to participate in GrafTech as a stockholder following the closing of the tender offer (subject to the merger provisions described below) with the benefit of Brookfield sponsorship going forward. A stockholder might choose to accept a combination of both cash and continued ownership of GrafTech shares.

The Company believes that Brookfield has an exceptional track record sponsoring public companies in difficult underlying market conditions, including significant knowledge and experience in steel, mining and metals, and other industrial sectors.

The day after the news was announced, Benchmark Mineral Intelligence published a report on the transaction, noting that while ostensibly it might look like “a foray to acquire a world leading steel anode and refractory producer,” in fact, “the long term value lies in its research into new energy storage and advanced material markets.” The firm states:

Although Brookfield has not yet gone on record to explain their rationale for purchasing GrafTech,Benchmark Mineral Intelligence anticipates it is more to do with the company’s leading research into new markets and less about its number one business, steel electrodes.

While sales to steel or industrial-orientated customers equated to $840m last year, long term concerns over the health of this sector persist. China, the driver of the steel market, has spent the past 18 months attempting to correct the huge overcapacity and overproduction that has beset the industry.

This long term plan to bring the country in line with real demand for steel leaves many believing that the sector is settling a new lower demand equilibrium with less steel being produced from now on, and less raw materials needed as a result. This was also flagged by the company in its Q1 2015 results.

GrafTech’s sales numbers in its Industrial Materials division back this up.

While sales reached a peak of $1.32bn in 2011, they have continued to fall since and now stand at $840m. Revenues now are 2% lower than they were 7 years ago in 2007, the furthest back data is available from the company.

With such a huge demand gap unlikely to be filled, even by a more buoyant and hopeful India, this leaves many fearful over steel’s medium term future and searching for new growth markets.

Click here to read the full GrafTech International Ltd. (NYSE:GTI) press release.