Mittal/Arcelor - Behind the merger

Résumé du document

In January 2006, Arcelor's share was valued 2.9 times its 2005 EBITDA on the stock market. Six months later, Mittal's last offer to Arcelor amounted to 4.9 times its 2005 EBITDA. This paper studies the developments that took place between these two evaluations and their reasons. In the first part it will focus on the reasons for the merger, and in the second part on its details. To conclude, we will analyze if Mittal paid too much for Arcelor.

Extraits

[...] Buying cheap industries in developing countries and rationalising the production process through massive human resources and financial cuts. A Mittal model ? Progression of the EBITDA between 2002 and 2005 Mittal became the world leader in 4 years only Profitability Synergies Products Distribution networks vs. prospection activities and production of raw materials Geographic complementarity Geographic synergies Arcelor's and Mittal's financial situation Analysis of the Income Statement, the Cash Flow Statement and the Balance Sheet. Why was Arcelor an attractive company? What were the weaknesses that made that Arcelor was bought successfully? [...]

[...] Financial Strength Capital Structure Net debt / EBITDA: It would take Arcelor 80 days to refund its debt. The ROCE ratio indicates the efficiency and profitability of a company's capital investments. Asset Utilization 1. Strategies for value creation Boost NOPAT through increased revenues increase geographic and market coverage increase sales capacities to 120 Mt/year improve customer segmentation Decrease capital costs improving Arcelor's working capital and capacity utilization achieve scale Improve NOPAT through a decrease in operating costs reduce promotional, HR or legal service costs Mittal's method imposed to Arcelor ? [...]

[...] Why do managers contest takeover bids? They believe that resistance will increase the offer price. They want to prevent takeover and retain their positions. Takeover defenses can either: Precede a takeover offer ; e.g.: special provisions in the corporate Charter. Follow the offer. Arcelor's set of defenses Feb. 2006: the distribution of extraordinary dividends. A 85% increase of annual dividends. Arcelor's set of defenses Feb. 2006: the distribution of extraordinary dividends. A 85% increase of annual dividends. [...]

[...] Arcelor's set of defenses Feb. 2006: the distribution of extraordinary dividends. A 85% increase of annual dividends. April: the locking-up of a strategic asset (Dofasco) in an independant Netherlands-based trust. The rules governing this foundation prevent the selling of Dofasco for 5 years, which is a serious hindrance to Mittal's plans: Mittal had already signed an agreement to sell it to ThyssenKrupp of Germany. Mittal had planned to divest Dofasco in order to gain antitrust clearance in the US. May: the initiation of a legal action against Mittal Steel USA for violation of technology. [...]

[...] Allgheny Technologies Inc. Ternium SA Why so many M&As at the moment ? Stock crisis in 2001-2002: firms' financial banking debt not counterbalanced by market valuation anymore. 2002-2005: as a result, firms concentrated on decreasing the proportion of their debt as regards their equity Since 2004: increase in the firms's profit and stock prices. They can go to the bank again to have the necessary funds for external growth. Some reasons to engage in M&As Gain market power on clients and suppliers: decrease the price of COGS and increase the price of the product Productivity gains: saving of fix costs, economies of scale and scope Enter new products or market areas Imposed by the competitive situation Figures on the steel industrySource: http://www.citac.info/steeltaskforce/attach/MEMA_Study_May_2005.pdf Since 2003, steel prices have risen by 100% ie well above the 20-year average The market value of steel manufacturers have increased by 50% or more Two global forces that have structurally changed the steel market: Increases in world demand (especially China) Consolidation of the steel industry sector Increase in world demand China and the steel industry The world's largest steel consumer and steel producer Explosion of its domestic consumption that is forecasted to continue Chinese output has risen at a compounded annual growth rate of over 20% from 2001-2004 The rest of the world Outside of China, world demand for and supply of steel have remain stable Projections: slight increases in both capacity and production outside of China Concentration to answer the risigin Chinese demand Arcelor in 2004: growth in 2004 Different financial profiles Arcelor: 2nd ranking world steel producer with a production of around 47 millions tonnes a year. [...]