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Cleveland Cliffs to acquire ArcelorMittal USA

By: Laura Sanchez Perez, Alex Gordon, Sargun Sareen and Nico Newman


Deal overview


Summary (shorter is better): Cleveland-Cliffs Inc. (NYSE: CLF) announced that it will acquire all of the operations of ArcelorMittal USA for approximately $1.4 billion. Cleveland-Cliffs will pay about $873 million of common and non-voting preferred stock, and $505 million in cash


Upon closure of the transaction, Cleveland-Cliffs will be the largest flat-rolled steel producer in North America, with combined shipments of approximately 17 million net tons in 2019. The company will also be the largest iron ore pellet producer in North America, with 28 million long tons of annual capacity.



Company Details: Cleveland Cliffs


Headquarters: Cleveland, Ohio

President/CEO: Lourenco Goncalves

Number of employees: 2,372

Market capitalisation: $5.65 billion

EV: $11.23 billion

LTM Revenue: $3.63 billion

LTM EBITDA: $0.2 billion

LTM EV/Revenue: 3.09x

LTM EV/EBITDA: 56.15x

Advisor: Goldman Sachs & Co.


Company Details: ArcerolMittal


Headquarters: Luxembourg, Lu

President/CEO: Lakshmi Mittal

Number of employees: 191,000

Market capitalisation: $22.08 billion

EV: $30.68 billion

LTM Revenue: $54.6 billion

LTM EBITDA: $1.56 billion

LTM EV/Revenue: 0.56x

LTM EV/EBITDA: 19.67x

Advisor: BofA Securities



Background


The question to this deal is why? Why now and why the form it is taking. Cleveland-Cliffs is purchasing six steel making facilities, eight finishing facilities, two iron ore and pelletizing operations, and three coal and coke-making operations. The combined entity will save CLF over $150 million in savings.


The sale will improve ArcelorMittal’s risk profile and reduce net debt as Cleveland-Cliffs will assume the liabilities of ArcelorMittal USA, including net liabilities of approximately $500 million and pensions and other post-employment benefit liabilities. The enterprise value of the deal is about $3.3 billion.


From Arcelor Mittal’s perspective, selling operations to repurchase stock and also pay down long term debt, as it readjusts to the decline in steel prices due to the pandemic. ArcelorMittal has predicted that steel prices, a barometer for the global economy, will take over a year to recover to pre pandemic levels in an update to investors in July. This maneuver is part of a strategy to strengthen its balance sheet and make it well positioned to benefit from lower debt servicing costs.



Synergies


With Cleveland-Cliffs and ArcelorMittal both already being steel producers, there are numerous areas of crossovers where significant synergies can be achieved. ArcelorMittal’s US division currently holds assets including: mines, blast furnaces, electric arc furnaces, and finishing facilities. It will be possible for Cleveland-Cliffs to integrate these assets seamlessly into its current portfolio of production sites. One such example is the impressive growth in electric arc furnace capacity which will be achieved through this deal - double Cleveland-Cliffs previous capacity. The acquisition is expected to generate up to $150 million in cost savings annually for Cleveland-Cliffs.


This is in addition to $151 million of annual savings already achieved through cliffs’ previous acquisition of AK Steel, a local competitor. Furthermore, Cleveland-Cliffs expects the acquisition to reduce the Company’s leverage from 4.3x to 3.6x on a pro-forma 2019 adjusted EBITDA basis. Overall, this deal is a highly synergistic transaction due to the similar nature of the two businesses.



Concluding remarks


The transaction has been approved by the board of directors of both companies and is expected to close in the fourth quarter of 2020, subject to the receipt of regulatory approval and the satisfaction of other customary closing conditions.

The cash consideration from Cleveland-Cliffs is expected to be financed using available cash on hand and liquidity. Cleveland-Cliffs has received commitments to increase its existing Asset Based Lending Facility. Upon close of the transaction, ArcelorMittal USA inventories and accounts receivable are expected to further increase the Company’s pro forma combined borrowing base, enhancing availability and overall liquidity.




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