Array

NEW YORK, Mar 4 (Reuters) U.S. Steel Corp. is in talks to acquire AK Steel Corp. in a stock transaction that would potentially create the world's sixth-largest steel producer, the Pittsburgh Post-Gazette reported on Friday.

Shares in AK Steel, a frequent subject of takeover speculation, were up as much as 23 per cent in morning trading.

Citing documents obtained by the newspaper, the Post-Gazette said U.S. Steel directors were told on Tuesday that AK Steel had been presented a preliminary price based on a stock transaction. It was not clear what that price was.

However, the newspaper said U.S. Steel has also indicated it would be flexible about using a mix of stock and cash.

Spokesmen for both AK Steel and U.S. Steel declined to comment on the report.

Any deal would be expected to close around the end of October, the newspaper said.

The deal would be the latest in a rapidly-expanding consolidation of the global steel industry, led by top producer Mittal Steel, which is making a $23 billion hostile bid for industry No. 2 producer Arcelor.

American steel makers like U.S. Steel and AK Steel were themselves mentioned as takeover targets earlier this year when Arcelor and ThyssenKrupp AG were in a bidding war for Canadian producer Dofasco Inc., a contest Arcelor ultimately won.

That speculation has helped boost shares, and through Thursday's close the Dow Jones steel index was up 28 percent on the year.

BETTER OFF BIGGER Michelle Applebaum, of Michelle Applebaum Research, said that while U.S. Steel does not need to make an acquisition to keep up with the increasing size of its competitors, the steelmaker would be better off as a larger company.

''Being able to have more operating units in and of itself is accretive,'' Applebaum said.

She said that a combined company would also be able to take advantage of U.S. Steel's access to raw materials and AK Steel's purchasing expertise.

AK Steel shares were up as much as high as $13.95 in early New York Stock Exchange trading before paring their gains to be up $2.18, or 19.2 percent, at $13.52 in late morning trade. U.S. Steel shares, after rising as much as 2 percent, were unchanged at $57.60 just ahead of noon on the NYSE.

One possible obstacle for the deal is AK's underfunded pension plan, which U.S. Steel would likely have to absorb.

AK Steel had about $3.12 billion in long-term pension and post-retirement benefit obligations at the end of 2005 and plans to make $84 million in pension contributions this year.

Analyst Charles Bradford of Bradford Research/Soleil said any plan to buy AK Steel would likely be contingent on a deal to lower these costs, known in the industry as legacy costs.

''Nobody wants them if they can't get those legacy liabilities at least capped,'' Bradford said.

Many of AK's competitors, including U.S. Steel, have in the past four years secured contracts with their unions to cut legacy costs.

But AK Steel, which has historically had acrimonious relationships with labor, has not yet reached deals to lower the obligations with all of its unions.

Earlier this week, AK Steel locked out 2,700 workers at its main plant, saying it wanted a ''new-era labor agreement'' that reflected current costs and competing agreements at other steel producers.

That union, the Armco Employees Independent Federation, was not immediately available to comment on the reported talks.

REUTERS SD PM2007