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Another Deal for Arcelor Mittal?

Posted on: Wednesday, 9 May 2007, 12:00 CDT

Could the acquisition-minded Mittals be circling AK Steel (AKS)? Shares of the Middletown [Ohio] steel fabricator surged May 8 on a report that Luxembourg-based global steel giant Arcelor Mittal (MT) is planning a bid for the company.

According to a report on FT.com, Arcelor Mittal plans a $40 per share bid for AK Steel. The company, through a spokesman, declined comment on the news, and CEO James Wainscott has repeatedly said that AK Steel wants to stay independent, according to a May 8 Associated Press report.

Arcelor Mittal, spearheaded by its founder and chief executive, Lakshmi N. Mittal and his son, CFO Aditya Mittal Aditya Mittal [see BusinessWeek, 4/16/07, "Mittal & Son"], may be looking to bolster its U.S. presence after its $4.5 billion acquisition of International Steel Group in 2004-- which included assets of the old Bethlehem Steel. That deal turned the company giant into a top player in the U.S. industry.

AK Steel produces flat-rolled carbon, stainless, and electrical steels, as well as tubular products in the U.S., with a large portion of its sales going to auto manufacturers. Its continuing turnaround may be attracting the Mittals. AK Steel has dramatically cut costs and reduced both its funded debt and underfunded pension and health care liabilities, notes a Standard & Poor's research report. Also, it has obtained concessions on retiree and health care costs on nearly all of its labor contracts to eliminate its estimated $30 per ton cost disadvantage vs. other domestic steel companies.

AK Steel shares jumped 9.1% on May 8 to $34.99 on more than three times their normal trading volume, after touching a 52-week high of $37.70 earlier in the session. The rise caps an impressive year-long comeback for the shares, which hit a 52-week low of $11.11 on May 24, 2006. Arcelor Mittal shares dipped 2.5% on the news to $56.02 in morning NYSE trading May 8.

Shares of U.S. Steel (X) rose 2.7% to $108.52, perhaps in sympathy with the AK Steel advance. No. 1 U.S. player Nucor's (NUE) shares fell 1.1% to $65.73.

Standard & Poor's equity analyst Leo Larkin downgraded his opinion on AK Steel to hold from buy after the news. "We view AKS as a highly-leveraged, special turnaround situation," Larkin wrote in a note. "With little upside to our 12-month target price of $40, we would not add to positions."

The Mittals have cobbled together a global behemoth with $59 billion in annual sales, first by taking over fading steel mills that no one else wanted, and then moving up the value chain to snag higher-quality, more-efficient mills. The crowning touch was the company's $38 billion takeover of European giant Arcelor in June, 2006. The Mittals may also be seeking other prizes, with speculation swirling around Vallourec, a big French maker of pipes for the oil industry.

If the Mittals are indeed in the hunt for AK Steel, expect a tenacious pursuit.

Source: Business Week

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