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ArcelorMittal’s (MT) board confirmed its plan to spin-off the company’s stainless steel division in the hope of ‘maximizing shareholder value’ and capturing the division’s growth potential. The new company, which will be called APERAM, will be listed on several international exchanges (including Euronext Paris and Amsterdam), but will only trade OTC in the US in the form of NY Registry Shares. The spin is expected to be completed during Q1 2011 and MT shareholders will receive one APERAM share for every twenty MT shares owned.
Despite employing over 11,000 people, the stainless steel division is only a small piece of the world’s largest steel maker’s operations. According to the prospectus (a summary of which can be found here), APERAM has a production capacity of 2.5 mm tons, which is concentrated in six production facilities located in Brazil, Belgium and France. The company has been managing its business according to three operating segments (Stainless & Electrical Steel, Services & Solutions and Alloys & Specialties) since April 2010. It sells most of its products to customers in the following industries: domestic appliances and household equipment, automotive, construction, and general industry. Several of those industries have been amongst the hardest hit hard by the global slowdown so it is no surprise that the division has suffered as well. Here is a look at the stainless steel segment’s recent operating history:
| (Data in Millions)1 | 2006 | 2007 | 2008 | 2009 | 9 Months – 2010 |
| Revenues | 3,261.0 | 9,349.0 | 8,341.0 | 4,234.0 | 4,180.0 |
| Operating Profit | 353.0 | 876.0 | 383.0 | (172.0) | 219.0 |
| Assets | 4,949.0 | 5,564.0 | 7,447.0 | 3,772.0 | – |
| Depreciation | 99.0 | 275.0 | 323.0 | 315.0 | 224.0 |
| CapEx | (61.0) | (263.0) | (262.0) | (127.0) | (75.0) |
| Appx Tons Shipped (mm) | 0.9 | 1.9 | 2.0 | 1.4 | |
| 1: 2006 results begin from August 1 | |||||
The past few years have been challenging for the business which witnessed sharp declines in shipments, revenues and profits. Additionally, the company appears to be operating at low utilization rates. While results are improving this year (even in their margins), the company believes that there is a tremendous amount of competition and overcapacity in the stainless steel market (especially in Europe). As a result, many believe that the industry would benefit from consolidation, an easier endeavor with MT’s stainless division operating as a standalone company. Looking ahead, the long-term trends are still positive for the industry according to the company, which expects stainless steel demand to grow at a healthy 8%/year.
Following the spinoff, the parent will be hit with a non-cash impairment charge of approximately $ 800 million and the stainless steel business will have approximately $1bn of net financial debt comprised of a combination of existing ArcelorMittal debt transferring with the stainless steel business and new debt raised by this business. While there will likely be profitable opportunities for investors, the potential gain from ‘forced selling’ might be more muted in this case as a result of the company’s location (owners are mainly global or international focused funds with small positions). Much of the upside will be tied to a global recovery and increased demand for stainless steel along with management’s ability to operate the company efficiently on its own. A list of the risks (of which there are many) can be found in the prospectus. Shareholders will vote on the spinoff on January 25, 2011 although there probably won’t be much fanfare at the meeting considering Lakshmi Mittal’s control over the company. We will keep you updated in the meantime.
Disclosure: Author holds no position in any stock mentioned.
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