Tough markets prompt ASW bid for rival Co-Steel

ASW, the troubled steel maker, is poised to buy its smaller rival, Co-Steel Sheerness, in a deal which would create an industrial group with annual turnover of more than pounds 500m.

Shares in Cardiff-based ASW were suspended at 18.5p yesterday after it said it was in advanced talks with Co-Steel Inc, the loss-making Canadian steel producer, over the acquisition of its UK subsidiary.

Sources said the deal could be completed this week. They added that a tie-up between ASW, the UK leader in the production of steel for the construction industry, and Co-Steel would lead to a number of redundancies among the enlarged group's 3,200 workers.

Most job losses are set to come from the floors of ASW's Cardiff factory and Co-Steel's works in Sheerness, Kent, as the combined group implements large cuts in production.

Insiders said ASW's takeover approach was driven by its need to mitigate the effect of tough market conditions on earnings. They added that the two companies operated in the same markets and would be able to extract "massive rationalisation benefits" from a merger.

"This is all about the reduction of capacity and the change in the product mix, and has been caused by the current state of the steel industry," said a person close to the talks.

Both groups' earnings have been savaged by the strength of the pound. Last year ASW, which derives half its turnover in the UK and half in France, posted profit before interest of pounds 700,000 on turnover of pounds 460m as steel prices fell. Co-Steel Sheerness turned over pounds 150m, mostly in its Kent plant, which has the capacity to produce about one million tons of steel a year.

The company, founded in 1971, accounts for around a quarter of its Canadian parent's annual production. Co-Steel Inc is one of the world's largest steel producers: last year it had sales of $1.6bn (pounds 950m) and lost $29.1m.

Buying Co-Steel Sheerness would help ASW strengthen its position in the production of steel for building contractors and civil engineers. It is already a leading European player with plants in the UK, France, Holland, Belgium and Italy.

Both companies said a merger would not give rise to competition issues as the European steel market is fragmented.