SAN FRANCISCO (Dow Jones) -- United States Steel Corp. (NYSE:X) placed a bet on oil Thursday, inking a $2.1 billion cash deal to buy drill-pipe specialist Lone Star Technologies Inc. (NYSE:LSS)
"With continued high energy-price forecasts and anticipated growth in North American drilling, most industry observers believe tubular-product demand should remain robust," said John Surma, chief executive of Pittsburgh-based U.S. Steel (NYSE:X) (X) , during a conference call with analysts.
He shrugged off a warning by oilfield operator Nabors Industries Ltd. (NYSE:NBR) (NBR) , which earlier Thursday said lower-than-expected U.S. rig activity would weigh on first-quarter earnings.
While saying "we would like to have more rigs working than fewer," Surma characterized the lone Star (NYSE:LSS) deal as "a long-term strategic decision in a combination that we expect to provide benefits over a range of market conditions."
By buying Lone Star (NYSE:LSS) (LSS) , U.S. Steel's (NYSE:X) adding production of welded pipes used in energy drilling and transportation, a market to which it already supplies higher-margin seamless pipes. The deal will rachet up U.S. Steel's (NYSE:X) yearly output of North American tubular steel to as much as 2.8 million tons, which would rank the company as the largest such producer in this market.
The deal also adds more finished products to U.S. Steel's (NYSE:X) arsenal. The company, whose business involves turning iron ore into steel sheets, bars and eventually products like oil pipes, ranks as the biggest integrated steel producer in the United States after world leader Arcelor Mittal (NYSE:MT) (MT) .
Under the terms of the deal, U.S. Steel (NYSE:X) offered to pay $67.50 a share in cash for Lone Star (NYSE:LSS) . The offer represents a 39% premium to Dallas-based Lone Star's (NYSE:LSS) Wednesday closing price and a 43% premium to the stock's 90-day average trading price.
Shares of U.S. Steel (NYSE:X) rose as much as 4%, setting a 52-week high at $101.59 and trading lately at $100.28, up 2.7%. Lone Star's (NYSE:LSS) shares jumped 37% to $66.01, after earlier cruising to 52-week high at $66.50.
The deal set the stage for a broader rally in steel stocks.
Ipsco Inc. (NYSE:IPS) (IPS) , another big producer of pipes used by the energy industry, jumped 9.6% to $129.55, while Allegheny Technologies Inc. (NYSE:ATI) (ATI) gained 2.3% to $ 107.53. The SIG Steel Producers Index (STQX) rose 2.6% to 499.7 points, also passing through a new 52-week high.
U.S. Steel (NYSE:X) expects the deal to add to earnings per share this year, excluding synergies and inventory-related accounting adjustments.
Combining the two companies' operations will generate annual, pre-tax operating synergies of more than $100 million by the end of 2008, U.S. Steel (NYSE:X) said.
"This transaction represents a compelling strategic opportunity for U. S. Steel to strengthen our position as a supplier to the robust oil and natural-gas sector," said Surma said in a statement.
U. S. Steel will pay for the acquisition with cash, financing from its existing receivables purchase program and three new fully committed bank credit facilities provided by J.P. Morgan Chase & Co. (NYSE:JPM) (JPM) , the company said.
Pending approval by Lone Star's (NYSE:LSS) shareholders and regulators, the companies expect the deal to close in the second or third quarter.
(END) Dow Jones Newswires 03-29-07 1246 Copyright (c) 2007 Dow Jones & Company, Inc.
