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Legato Merger Corp. (LEGO) to Combine with Algoma Steel in $1.7Bn Deal

Legato Merger Corp. (LEGO) to Combine with Algoma Steel in $1.7Bn Deal

Legato Merger Corp. (NADAQ:LEGO) has entered into a definitive agreement to combine with leading steel producer Algoma Steel Inc. at an enterprise value of $1.3 billion at closing and $1.7 billion inclusive of contingent consideration, or 1.9x 2021E adjusted EBITDA.

The Ontario-based company is a fully-integrated steel manufacturer of hot and cold rolled steel products.  Algoma’s cornerstone asset is the Direct Strip Production Complex which transforms liquid steel to finished coil in minutes and positions the company as one of North America’s leading suppliers of high strength and light strength gauge steel.

The combined company is expected to trade on the Nasdaq once the deal is completed in the third quarter of 2021, but has yet to announce a ticker symbol.

Transaction Overview

Legato brings about $236 million into the deal through its current trust along with a $100 million PIPE at $10 per share.  The PIPE drew investments from Legato’s chairman, strategic steel industry players as well as TD Wealth Management, Vantage Asset Management, JC Clark, Hite and Goodwood Fund.

Algoma expects to add $306 million to its balance sheet through the deal and Legato must maintain at least $200 million of cash in order for the deal to close.  The company intends to use the proceeds to accelerate strategic investments in the business, including an investment in electric arc steelmaking which would enhance earnings potential and substantially reduce Algoma’s carbon footprint by approximately 70%.

Existing company shareholders are expected to own approximately 74% of the combined entity which includes a 49% upfront consideration and a 25% earnout.  Legato shareholders are expected to take 15% with PIPE shareholders 7% and the SPAC’s sponsor is set to own 4%.

Up to 37,500,000 of Algoma common shares are payable to Algoma’s existing shareholders and management team if certain adjusted EBITDA targets for calendar year 2021 or stock price targets in the five years following closing are achieved.

Algoma’s common shares are to be locked up until the six-month anniversary of closing and the date on which the closing share price equals or exceeds $12.50 per share for any 20 trading days within any 30-trading day period.  The  SPAC sponsors will be subject to the same lock-up except that the release date will be the twelve-month anniversary of the closing.

Algoma will continue to be led by CEO Michael McQuade, CFO Rajat Marwah, and VP of Strategy and General Counsel John Naccarato.

Quick Takes: The once bankrupt Algoma is now one of the leading flat steel producers in North America and hopes to soon be the cleanest producer of steel.

The Canadian steel company dramatically improved its operations over the past several years.  Just a few years ago, Algoma was facing volume constraints with limited grade capability and just average quality, had legacy environmental contamination issues, and an unsustainable leverage with over $1 billion in debt and $172 million in annual interest expenses.

Fast forward to today and the company has managed to overcome these obstacles and push itself to the frontline of steel production.  Algoma is now seeing operational improvements by modernizing its facilities, taking cost cutting measures, and is generating significant cash flow to add liquidity.  The company was able to reduce its net debt to approximately $485 million and lowers its annual interest expenses to around $35 million.

Algoma Steel hopes to claim the title of the cleanest steel producer in Canada in the near future through this business combination.  As of now, electric arc furnace (EAF) producer and competitor Steel Dynamics has the highest EAF capacity utilization at 92% with Algoma trailing closely behind at 91% capacity utilization.  Both of the companies have EBITDA margins of 15%.

The $500 million proposed investment in EAF would provide Algoma a $150 million EBITDA uplift, realized by 2024, and lower its CO2 emissions by approximately 70%, which is equivalent to decommissioning a coal power plant.  This transformation from blast furnace producer to EAF producer would unlock significant benefits to the environment such as a 100% reduction of stack and fugitive emissions along with a reduction in its exposure to iron ore pricing volatility as it would be replaced by a regional scrap supply that is readily available.  Algoma would be able to enhance the stability of its overall profitability, and improve its environmental footprint at the same time.

Algoma appears to be valued at a steep discount of 1.9x 2021E EBITDA compared to peers in the EAF and blast furnace sectors,  which on average trade at 5.2x and 3.5x in 2021E EBITDA, respectively.  EAF producer and competitor Nucor has an EBITDA of 5.4x in 2021E.

Algoma already locked in highly attractive sales prices through September 2021, and expects to generate $901 million of EBITDA in CY2021P due to a strong steel market.  Steel prices are at all-time-highs, with HRC climbing to over 1,500/ton, which is driven by a demand from infrastructure, automotive, and construction end markets.

The company believes it will see further improvement once the modernization of its mill is complete, adding $35 million to its EBITDA, and once the EAF development is finalized, adding an additional $150 million to its EBITDA to be realized in 2024.

Click here to view the full investor presentation.


  • Paul, Weiss, Rifkind, Wharton & Garrison LLP and Goodmans LLP are acting as legal counsel to Algoma
  • Jefferies LLC is acting as financial advisor to Algoma.
  • Graubard Miller is acting as legal counsel to Legato
  • EarlyBirdCapital, Inc., BMO Capital Markets and Maison Placements Canada are acting as financial advisors to Legato.