Black Diamond Capital Management's $150M buyout of Bayou Steel

New Orleans CityBusiness, Mar 27, 2006 by Jaime Guillet

Bayou Steel stock received a prodigious boost last week as the news of a potential buyout reached the stock market.On March 17, Bayou Steel Corp. announced it had entered into a definitive agreement with an entity managed by common stock holder Black Diamond Capital Management LLC for a per-share purchase price of $75 for all outstanding shares.

Upon news of the likely $150-million buyout, Bayou Steel shares climbed from $46 to a final closing price of $72 - a 57 percent jump.From Bayou Steel's perspective, it's our fiduciary responsibility to give our stockholders a significant premium, said Jerry Pitts, president and CEO of Bayou Steel.But one expert characterized the buyout as peculiar.Bayou Steel manufactures light structural and merchant steel products at a mill in LaPlace and also has a rolling mill in Harriman, Tenn. Meanwhile, Lake Forest, Ill.-based Black Diamond is an alternative asset management firm with more than $8 billion under management.Dave Phelps, president of the Washington-based American Institute for International Steel, said he thinks it is unusual that a capital management firm would attempt a buyout of a steel company.Bayou Steel is an old, small company so it's not surprising it's being bought out, said Phelps. What is surprising is that it hasn't been bought out by a competitor.Phelps said the trend over the past few years has been steel companies going after other steel companies and he said he is not aware of similar situations.Bayou Steel is a very small company and to the best of my understanding, a very good company, said Phelps. This (attempted buyout) had me scratching my head.Pitts disagrees. He said he doesn't consider a buyout by a capital firm to be such an unusual situation and says it's an attractive investment for a firm like Black Diamond because it benefits from a company generating a lot of cash flow. It sees an opportunity to attain an attractive return for their investors, said Pitts.Peter Ricchiuti, a research director at Tulane University's A.B. Freeeman School of Business, says this type of buyout is becoming more common.What's happened is these private equity firms have so much money they look for good investments and have been buying up many public companies, said Ricchiuti. A lot of these companies are sick of being public because there are so many issues involved with being public. It's just not fun anymore.Pitts said Black Diamond offered the maximum value to stockholders. He said Black Diamond is a strategic partner because it understands the business and it will bring substantial financial backing to stockholders. Black Diamond has been a holder of either debt or equity since 1998, said Pitts. They have a seat on our board of directors and they know some of our strategic points are capital growth and improving our horizontal acquisitions.Black Diamond refused to comment for this story.Ricchiuti said Bayou Steel successfully emerged from bankruptcy in 2004 because it has good cost and management efficiency, and it was aided by the upward swing of the overall steel market.Following a proxy review by Bayou Steel shareholders, the buyout is expected to be approved by June.