By Arno Schuetze and Maria Sheahan
FRANKFURT, Sept 25 ThyssenKrupp, Germany's biggest steelmaker, is considering wooing suitors for its loss-making steel mills in Brazil and the United States with perks, in the expectation that initial bids this week will be low.
"Thyssen will offer to set up cooperations and to guarantee purchasing of a certain amount of steel," one banker familiar with the industry said. Another said Thyssen could agree to absorb future losses from the mills for a certain time.
ThyssenKrupp said in May it was considering all strategic options for the two steel mills, including a partnership or a sale, to halt losses there and refocus the group on its core European business.
Chief Executive Heinrich Hiesinger wants to sell the mills separately for at least the book value of 7 billion euros ($9.2 billion).
And while that is already well below the company's investment of closer to 12 billion euros, bankers and analysts expect Thyssen to be disappointed by indicative offers due this week as dim short-term prospects for the assets limit any possible buyers' willingness to spend big.
"It's very tough to put a value on a business that is losing a billion euros per year... It's going to be defined on the business model that someone can put together for these plants," a U.S.-based investment banker said, who asked not to be named.
Several bankers said they saw the assets being worth 3-4 billion euros. UBS analysts were even more pessimistic, saying they saw the value of Steel Americas at only 3 billion euros, as they cut their recommendation on Thyssen shares to "sell" from "neutral" earlier this month.
At an initial stage, Steel Americas attracted the interest of more than 10 potential bidders, Thyssen has said.
According to several bankers, indicative bids are due on Sept. 28. Thyssen, which has not given any deadlines or said with whom it was holding talks, would not confirm that date.
According to bankers involved in the process, potential bidders include world No.1 steelmaker ArcelorMittal, U.S. Steel, Korea's Posco, Japan's Nippon Steel, China's Baosteel.
Other names mentioned by bankers include Japan's JFE , Nucor and AK Steel, and Brazilian rivals like CSN or Usiminas.
It is unlikely any one of these companies will bid on its own, though no consortia have been formed yet, one banker said. Final bids are likely to be due 6-8 weeks after the deadline for indicative offers, according to two people familiar with the transaction.
Thyssen's advisors Goldman Sachs and Morgan Stanley will try to get at least 2-3 bidders interested enough to drive the price.
Thyssen's brand new steel mill in Brazil has a capacity of up to 5 million tonnes of steel slabs, part of which are sold to the company's cutting-edge U.S. plant in Calvert, Alabama for processing into flat steel products used mostly by carmakers.
Initially, the construction of the two plants was meant to take advantage of low-cost production in Brazil to create a cost-effective and secure supply of slabs for the U.S. plant.
But wage inflation, rising costs for iron ore and the appreciation of the Brazilian real have made production in the Latin American country much more expensive than expected, just as demand from the U.S. car industry started to wane.
The plant in Alabama would be attractive to any buyer seeking more exposure to the U.S. market via state-of-the-art flat-rolled steel production. The mill in Brazil, meanwhile, offers a way to reduce dependence on slab-producing suppliers.
ArcelorMittal CEO Lakshmi Mittal recently said that everyone in the industry was looking at Steel Americas, but stopped short of saying whether Arcelor would bid for any of the assets.
Charles Bradford, steel industry analyst at Bradford Research in New York, cautioned that Arcelor cannot legally buy more in the United States. It was already forced to sell Sparrows Point, one of the largest U.S. steel plants, to gain approval for Mittal Steel's takeover of Arcelor SA.
JP Morgan analysts think there could be a deal with a U.S. domestic steel player based on an agreement by ThyssenKrupp to buy raw material or semi-finished steel at a discount.
For U.S. Steel, for instance, the Thyssen assets would help build more scale in flat-rolled steel, but market watchers were sceptical on whether the company would benefit from such a move.
"The U.S. market already has overcapacities - why should U.S. Steel add more home turf plants?" a banker familiar with the industry said.
A sale of the Brazilian mill, CSA, is complicated by the fact that the venture is a quarter owned by Vale.
And while Vale has said several times it was not interested in buying Thyssen's stake in CSA itself, the Brazilian miner is expected to take part in any negotiations.
Korea's POSCO, which already owns a stake in Brazilian steel mill CSP, has said it was studying the CSA mill.
The world's No.4 steelmaker, has been keen to expand oversees as it faces growing competition in its home market from local rival Hyundai Steel, backed by world No.5 automaker Hyundai Motor Group .
"It is meaningless for Posco to add capacity in the domestic market because of Hyundai Steel. The situation is not good in Asia either because of China's overcapacity," Kim Hyun-tae, a steel analyst at KB Investment & Securities in Seoul said.
Brazilian companies may seek to outmanoeuvre Asian rivals in the bidding for CSA, with CSN and Usiminas seen on the list of possible domestic bidders.
"For Brazilian bidders it is all about securing their supply relationship with Thyssen," an industry banker said.
A Brazilian newspaper reported on Tuesday that CSN has hired the investment banking unit of Banco Bradesco to advise on a potential bid.
One person said Brazil's Gerdau, meanwhile, was not interested.
Steel Americas as a whole posted an adjusted loss before interest and tax of 778 million euros in the nine months through June, after losing just over a billion euros the year before.
This gives Thyssen what one banker working for an interested company called a "weak negotiating position", as potential buyers could just lean back and wait for the price to drop.