ArcelorMittal’s G Steel Stake Widens Footprint in Asia

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Earlier this month, ArcelorMittal (NYSE:MT) announced that it has entered into an agreement to acquire a 40% stake in the Thai steel producer G Steel. [1] The deal which is subject to G Steel reducing its outstanding liability level will cost ArcelorMittal about $246 million. [2] The company competes with other international steel giants like BaoSteel, Posco (NYSE:PKX), Nippon Steel and ThyssenKrupp.

Since the announcement of the deal, ArcelorMittal’s shares have lost nearly 10% from above $37 to just below $34. Our price estimate for Arcelor Mittal stands at $40.67, roughly 15% above market price.

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What Does G Steel Have to Offer?

G Steel, along with its subsidiary GJ Steel, is a leading producer of hot-rolled steel coils. With a 1,400  strong staff, G Steel has a combined annual capacity of over 2.5 million tonnes of steel. ArcelorMittal’s 40% stake gives it a foothold in Thailand though would not result in any significant increase in capacity since ArcelorMittal produces over 100 million metric tons of steel annually.

ArcelorMittal clearly aims at increasing its presence in Thailand and the neighboring ASEAN countries which have seen significant economic development in the recent past, and where the demand for steel is strong and expected to increase considerably in the years to come.

The major concern in this deal for ArcelorMittal is G Steel’s profitability. G Steel has been reporting losses in excess of 10 billion baht ($332 million) for the last 2 years. [2] This combined with the high working capital requirements in the steel industry has forced the company to undertake a significant amount of debt. This could weigh on the company and reduce profitability in the future.

What is ArcelorMittal putting into the Deal?

ArcelorMittal announced that it would be buying  11.9 billion new shares of G Steel at 0.63 baht (just over 2 cents) per share. As the G Steel market price was hovering around 0.7 baht before the announcement, this represents a 10% discount for ArcelorMittal, and a total cost of around $246 million.

ArcelorMittal also seems to have addressed the high debt issue for G Steel by pledging $500 million as additional credit to help improve its working capital and repay a part of its loan. We can, hence, say that ArcelorMittal is putting in about $746 million in G Steel to help it turn around its business.

… and how much do they stand to gain?

The direct impact of the added capacity will be seen in an increase in the shipment figures for ArcelorMittal’s Asia, Africa and CIS (AACIS) division.

We estimated this division’s shipments to be almost 14 million tonnes for 2011. But this deal would increase this figure by at least 0.7 million tonne, and add about 1 million tonne to the shipment figures in the coming years.

While this represents a slightly more than 1% increase in our estimate for the company’s stock price, we believe it adds about $900 million in value to ArcelorMittal’s – increasing its estimated market cap from our current estimate of $63.5 billion to $64.4 billion. This certainly seems to be a bargain for the steel giant.

See full estimates for ArcelorMittal

Notes:
  1. ArcelorMittal to invest in G Steel, ArcelorMittal Investor News, March 3 2011 []
  2. Thai G Steel up 19 pct on ArcelorMittal stake plan, Reuters, March 3 2011 [] []