Iron ore miner Cleveland-Cliffs Inc. (NYSE: CLF) announced late Sunday that it will pay $1.4 billion to acquire the U.S. operations of ArcelorMittal S.A. (NYSE: MT). The transaction includes a cash payment of $505 million and a combined 78.2 million shares of Cleveland-Cliffs common and preferred stock.
The common stock portion of the deal is valued at around $500 million and the non-voting, preferred shares are valued at $373 million. The enterprise value of the transaction is about $3.3 billion, which includes Cliffs’ assumption of pension and other retirement liabilities and working capital.
As (when/if) the market for steel ever recovers, Cliffs may have gotten a very good deal. In its financial report for the first half of 2020, ArcelorMittal recorded an impairment charge on its U.S. operations (ArcelorMittal USA) of $600 million related to the company’s property, plant and equipment. The impairment charge followed a sharp downward revision of cash flow projections “resulting from a sharp decline in steel prices, lower ASC [apparent steel consumption] and high raw material costs.”
U.S. steel production declined by more than 17% year over year in the first half of 2020, according to ArcelorMittal’s six-month report, and the company expects global demand to be around 20% lower than 2019. Iron ore prices are higher and hot-rolled coil steel prices in the United States fell by $130 per metric ton year over year in the first half of the year to $593. However, the U.S. price was just $10 a ton lower than in the second half of 2019.
In March of this year, Cliffs completed an all-stock acquisition valued at $1.1 billion of AK Steel, a leading producer of flat-rolled carbon, stainless and electrical steel industrial and automotive parts.
Cliffs CEO Lourenco Goncalves commented: “The acquisition of ArcelorMittal USA amplifies our position in the discerning automotive steel marketplace, and further improves our position in important U.S. markets such as construction, appliances, infrastructure, machinery and equipment. It also adds to our strong legacy raw material profile and growing finishing capabilities.”
Cliffs wants to get more vertical and the acquisition of Arcelor Mittal USA is a relatively inexpensive way to do that. The iron ore miner estimates annual cost savings of $150 million and a “substantial increase” to its asset base, increasing both liquidity and the availability of secured borrowing.
Shares of ArcelorMittal traded up about 9.5% in the premarket session on Monday, at $13.24 in a 52-week range of $6.64 to $18.89. The Luxembourg-based firm expects to use the cash proceeds from the sale to repurchase shares. It’s not a dividend, but it’s more than investors would have gotten without the sale.
Cleveland-Cliffs stock traded up more than 10% at one point in Monday’s premarket but was last seen at $6.40, up about 9% from Friday’s closing price. The stock’s 52-week range is $2.63 to $9.02, and the consensus 12-month price target is $5.97.