ArcelorMittal Sells Partial Stake In Turkish Steel Company As Part Of Deleveraging
ArcelorMittal (NYSE:MT) announced that it has sold a partial stake of 6.66% in Erdemir, Turkey’s largest flat steel producer, to institutional investors. This transaction has brought down ArcelorMittal’s stake in Erdemir to 12.08% from 18.74% and generated $267 million in cash. The remaining stake cannot be sold before a lock-up period of 180 days expires. [1]
The stake sale is a part of an ongoing exercise by ArcelorMittal to pare down its heavy debt burden. The slowdown in the global economy, especially the European economy, has hit ArcelorMittal hard due to the protracted weak demand for steel. While demand in the U.S. is picking up gradually, economic activity in Europe continues to be weak. [2]
We have a price estimate for ArcelorMittal of about $16.50, which is nearly 16% higher than the market price.
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Second Stake Sale In Erdemir
This is the second stake sale ArcelorMittal has carried out in Erdemir. On March 28, 2012, the company had sold approximately 6.25% of its stake in Erdemir to bring down its ownership to 18.7%. The previous stake sale had generated $264 million in cash and ArcelorMittal had agreed to a one year lock-up period before divesting further stake in Erdemir. Therefore, it is likely that once the lock-up period after the latest stake sale expires in six months, ArcelorMittal will divest further shares in Erdemir. [3]
The earnings from Erdemir are accounted for using the equity method of accounting. The total income to ArcelorMittal from associates and joint ventures stood at $194 million in 2012, which is relatively insignificant for such a large company.
Stake Sale Part Of Deleveraging
ArcelorMittal’s debt rating has been downgraded to junk status by all major rating agencies such as S&P, Fitch and Moody’s, thus raising the company’s cost of borrowing for capital intensive businesses. The company has set itself specific debt reduction targets in order to improve its credit rating and is selling off non-core assets, idling excess production capacity and cutting costs across divisions. [4]
ArcelorMittal started the year 2013 with a net debt burden of $21.8 billion and had reduced it to $16.2 billion by the end of the second quarter. It is aiming to reduce its net debt to below $15 billion in the medium term, even though it hasn’t specified what the term implies in terms of years. The $15 billion target is the level of debt the company believes it can sustain at any point in the business cycle. The reduction is to be achieved through free cash flow generation and proceeds from M&A transactions. Since September 2011, ArcelorMittal has generated approximately $4.2 billion from asset sales through June 30, 2013. [5]
We have a price estimate for ArcelorMittal of about $16.50, which will be revised once the third quarter results are declared in November.
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Notes:- ArcelorMittal sells 233,169,183 Shares in Erdemir, ArcelorMittal News Release [↩]
- ArcelorMittal Sells 6.66% Turkish Steelmaker Erdemir Stake for $267 Million, WSJ [↩]
- ArcelorMittal 2012 20-F, SEC [↩]
- ArcelorMittal Q2 2013 Earnings Conference Call, Seeking Alpha [↩]
- Global Steel and Mining Conference ArcelorMittal Presentation, ArcelorMittal Website [↩]