ArcelorMittal Consortium Enters Agreement To Acquire Ilva

ArcelorMittal (NYSE:MT) and its partner Marcegaglia, announced that AM Investco has reached a binding agreement with the Italian government regarding the lease and obligation to purchase Ilva S.p.A. The ancillary documentation will be completed by the end of this month and Intesa Sanpaolo (MI:ISP) will officially join the consortium before the closing of the transaction.

The transaction details of AM Investco’s plans for Ilva include a purchase price of €1.8 billion, with annual leasing costs of €180 million, which will be paid in quarterly installments. The assets of Ilva`s will be primarily leased by AM Investco against the purchase price, with rental payments qualifying as down payments. The period of lease is minimum two years, which is expected to begin by the end of 2017, subject to regulatory approvals.

Per the deal, investments of €2.4 billion will be made over a period of seven years, including industrial capital expenditure (CAPEX) of €1.3 billion, environmental CAPEX of €1.1 billion. This will ensure that Ilva complies with the Integrated Environmental Authorisation (AIA), as recommended by the Italian government.

The environmental CAPEX also includes remediation amount of €288 million, which will be funded from the funds seized by the Italian government from Ilva’s former owners, the Riva Group. Funds will be used to introduce advanced low-carbon technologies in future, including carbon capture and the commitment to use DRI, when the economic sustainability is consistent with the industrial plans.

The deal will systematically increase finished steel shipments to 9.5 million tons by 2023 and crude steel production will be limited to 6 million tons per year, until AIA provisions are complied. The production of crude steel will be supplemented by imported hot rolled coil and slabs to maximize usage of Ilva’s finished steel facilities.

There is also a provision to ensure a smooth transfer of ArcelorMittal R&D, knowledge and intellectual property through a €10 million start-up investment in a new R&D facility centre in Taranto. This will enhance quality, operational efficiency and productivity at Ilva’s facilities. There will also be an asset transfer to AM Investco, which will be without any financial debt, long term liabilities and include net working capital worth €1 billion.

ArcelorMittal believes Ilva would prove to be a good investment without compromising on the strength of its balance sheet. It will provide an opportunity to expand leadership and product offering in Italy, the second-largest steel producing and consuming market in Europe.

ArcelorMittal and Marcegaglia have witnessed a long and fruitful relationship. While the global steel leader, ArcelorMittal, is able to provide strength and management competencies, Marcegaglia not only has a thorough understanding and knowledge of the Italian and European markets, but also a significant presence in it. The companies are confident of their ability to turn the future of Ilva around to make it a sustainable and profitable company.

The deal is expected to create synergies of €310 million by 2020, excluding impact from volume improvements and fixed cost reductions. Ilva is also expected to be EBITDA accretive to ArcelorMittal in one year, and free cash flow accretive in three years.

ArcelorMittal’s shares lost 26.1% in the last three months, underperforming the Zacks categorized Steel-Producers industry’s decline of 20.3%.

The company remains focused on progressing in three areas, namely cost optimization, product mix and volume growth. ArcelorMittal expects global apparent steel consumption (ASC) to rise 0.5–1.5% year over year in 2017. In the U.S., the company sees apparent steel consumption growth of 3–4% in 2017. The company also anticipates modest growth (0.5–1.5%) in apparent steel consumption in Europe. Moreover, apparent steel consumption is forecast to rise 3–4% in Brazil. Demand for steel in China is likely to stabilize in 2017.

ArcelorMittal should gain from its efforts to reduce debt, lower cost, expand capacity and improve efficiency. The company remains on track with its cost reduction actions under its Action 2020 program. The Action 2020 program includes plans to optimize costs and increase steel shipment volumes, along with improving the portfolio of high added value products.

However, ArcelorMittal remains exposed to volatility in steel prices. Demand for steel remains weak in Europe and China. Moreover, cheap steel exports from China still remain a woe.

ArcelorMittal Price and Consensus

ArcelorMittal Price and Consensus | ArcelorMittal Quote

ArcelorMittal currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the basic materials space include The Sherwin-Williams Company (NYSE:SHW) , The Chemours Company (NYSE:CC) and Huntsman Corporation (NYSE:HUN) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Sherwin-Williams has expected long-term earnings growth rate of 11.4%.

Chemours has expected long-term earnings growth rate of 15.5%.

Huntsman has expected long-term earnings growth rate of 7%.

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