Why AK Steel Holding Corporation (NYSE:AKS) Is Diluting Its Stock

-
0
Why AK Steel Holding Corporation (NYSE:AKS) Is Diluting Its Stock

AK Steel Holding Corporation (NYSE:AKS) has set in motion a process to dilute its stock in pursuit of additional capital. The company is offering 65 million shares to the public with an option to raise the offering by close to 10 million shares. AKS is seeking funds to repay its outstanding debt.

The company, which recently raised prices of some of its steel products, is offering each share at a price of $4.90. AK Steel has granted underwriters the option to purchase up to 9.75 million additional shares to cover oversubscription. It seems AK Steel anticipates strong demand for its shares. It’s been a great year for AK Steel in 2016 as the stock has gained more than 145% YTD.

Repaying $1.5 billion under revolver credit

AK Steel intends to use the net proceeds from the sale of the shares for repaying its borrowing under a $1.5 billion revolver credit facility. Extra funds will be used for unspecified corporate purposes. The company expects the equity fundraiser to close on November 1.

Product price hike

AK Steel this week announced raising the price of its carbon flat-rolled steel products by $30 a ton, with the new prices taking effect immediately. The company didn’t elaborate on the price hike, but it signals strengthening market conditions. Tariffs on Chinese steel imports has helped reduce competition and create an environment of higher prices for U.S. steelmakers, though this protectionism damages U.S. steel consumers and other U.S. companies that will get less revenue from U.S. steel consumers.

The freeze on OPEC oil production is also likely to lift oil prices, leading to increased activity in the energy sector that would drive up demand for steel.

3Q16 earnings beat expectations

AK Steel this week released 3Q16 earnings that far exceeded expectations. EPS of $0.21 rose sharply from $0.04 in the year-ago quarter and topped the consensus estimate of $0.133. However, revenue of $1.45 billion slid 15% YoY and missed the consensus estimate of $1.47 billion. A 24% decline in shipments in the quarter was cited as the reason for the weak sales.