European firms to form world's biggest steelmaker

European firms to form world's biggest steelmaker
REUTERS

Paris, Feb 19: France's Usinor said on Monday it would acquire Luxembourg's Arbed SA and Spain's Aceralia for 3.4 billion euros ($3.11 billion) in an all-share deal to create the world's largest steel firm, with an estimated annual output of 46 million tonnes and sales of 30 billion euros ($28 billion).

The three made clear that the need to rationalise lay at the heart of the merger, which comes as the European steel industry faces its toughest outlook for nearly a decade from global overcapacity and plunging prices.

Analysts said the deal would allow the companies to cutcosts and capacity in Europe, give them the base necessary to follow the globalisation of their big customers and could also herald further consolidation of the global steel industry.

However, like last year's failed three-way aluminium mergerbetween Pechiney, Alcan and Algroup, the combination is likely to come under the close scrutiny of competition authorities in Brussels.

"There is no doubt this is a nice combination, but there are uncertainties about restructuring and eventual asset sales so we are tempering our enthusiasm at this point," said a fund manager at a large French bank.

Although announced as a three-way merger, the deal is effectively a takeover by Usinor of the two smaller firms with the French group paying about 3.4 billion euros for the pair, based on Usinor's Thursday closing share price of 14.05 euros.

Under the all-share deal the three said they will create a new group, called NewCo, in which Usinor shareholders will hold 56.5 percent, Arbed 23.4 percent and Aceralia 20.1 percent. Aceralia shareholders will get eight shares in NewCo foreach seven Aceralia shares held, Arbed holders will get 10 shares for each share held, and Usinor holders get one share for each share held.

Shares in all three companies have been suspended sinceThursday. Shares in the new group will trade in Paris, Brussels, Luxembourg and Madrid and the entity will have Usinor and Aceralia chairmen Francis Mer and Joseph Kinsch as co-chairmen.

The exchange ratios represent a 56 per cent premium for Aceralia holders and a 57 percent premium for Arbed holders based on the average stock prices of the two companies over the past three months.

"These are substantial premiums, but I would argue they arejustified because Aceralia and Arbed are both very weakly valued in relation to the sector," said analyst Julien Onillon at HSBC.

The trio said the deal was designed to bring big cost savings and suggested the possibility of plant closures. Roughly 300 million euros in annual costs are expected to becut by the end of 2003, rising to a total of 700 million euros by 2006. Investment savings are seen at 350 million euros over the 2002-05 period.

"These gains are estimated based on the best performance ofeach company independent of the merger," the companies said. "They will come in large part from the progressive rationalisation of production towards the most efficient sites."

Combined, the three groups will dwarf the current world leader, Japan's Nippon Steel Corp, which produces approximately 28 million tonnes of steel each year and with which Usinor already has a strategic alliance. The new group will have a market capitalisation of over five billion euros, a proforma 2000 EBITDA margin of 12 percent and EBIT margin of eight per cent.

The deal comes amid ongoing consolidation in the fragmented European steel industry and builds on existing cross-holdings and cooperation pacts involving the three companies. Analysts said Thyssen Krupp AG and Corus Group Plc were twoother European consolidation candidates.

Ever since the merger of British Steel and Hoogovens to formhe Anglo-Dutch steel giant Corus there has been speculation that Europe's disparate steel interests would merge. Usinor tried to buy 35 percent of Aceralia in 1997, when itwas known as Corporacion Siderugica Integral, but the Spanish government instead sold the stake to the Luxembourg-based Arbed.

Usinor head Francis Mer has said that a good size for aglobal steel company over the next five years would be between 40 and 80 million tonnes.

The need to beef up suppliers' bargaining power and followthe trend of big steel users like car manufacturers in globalising their operations was the driving force behind a recent pact between Usinor and Nippon Steel.