Stelco Holdings Inc T.STLC

Pros and Cons to Cash

[Jasonuw]

There are pros and cons to having this much cash on the balance sheet. As has been mentioned here a few times, it really comes down to the large holders. If you have 1 billion in cash and a 3 billion market cap (which is ballpark what I expect at end of Q4), it basically sets a floor to what the stock should be. As a thought experiment: if the market cap was 500 million and Stelco had 1 billion in cash with no debt, every LBO firm, private equity, and hedge fund would kill to take it private. So let's say, the stock price floor is the amount in cash we have per share ~$13. There should be no reason for it to ever trade lower than that. And as Stelco makes money each quarter, that price floor keeps rising. The downside is with such concentrated ownership and this much cash, it becomes a target to go private. If you wanted to buy Stelco, you could approach the big banks and convince them to loan you 80-90% of the purchase price of $3B. You need to put up 10-20%. That is 300-600 million. After it closes, you can give yourself a $1billion dividend that is currently on the balance sheet. And you have effectively tripled your money. Stelco is still making loads of money and if they can satisfy the covenants, I don't see why lots of companies would not look at this right now. The downside is for long-term small shareholders. With such a concentrated ownership, if the large holders all approve a 5% (really small) purchase premium to closing price yesterday, we all have wasted our time on peanuts. I trusted West Fraser when they had almost 40% of market cap as cash on their balance sheet. I don't know about this team. I say that they should return the cash. Set up a Substantial Issuer Bid for 1.1 billion and get the share count under 50 million. The longer this goes on, the more risk there is to a takeover bid. This year they will earn 1.5billion in Net Income. If they earn the only HALF that amount next year, with an outstanding share count of 50 million, that's $15 a share - if the share price has risen by then - great! And if it hasn't, then they can buy back another 19 million shares. In 13 months, we could be down to 31 million shares. Keep it going until the market appreciates how much this company is earning.