September 11, 2018 / 11:21 AM / 10 days ago

ArcelorMittal's sweetened offer for Essar Steel knocks shares

BRUSSELS (Reuters) - ArcelorMittal (MT.AS) shares fell more than 2 percent on Tuesday after the company raised its offer for India’s debt-laden Essar Steel, prompting concerns that it was paying too much.

FILE PHOTO: A logo is seen on the roof of the ArcelorMittal steelworks headquarters in Ostrava, Czech Republic, April 1, 2016. REUTERS/David W Cerny/File Photo

The world’s largest steelmaker is forming a joint venture with Japan’s Nippon Steel & Sumitomo Metal Corp (5401.T) to bid for Essar in competition with Russian lender VTB (VTBR.MM) and Vedanta Resources (VED.L).

ArcelorMittal said on Monday that it had submitted a revised proposal representing a “material increase” on its two previous offers, adding on Tuesday that media reports on the amount it was offering were “broadly accurate”.

Indian media reported that ArcelorMittal had raised its bid to 420 billion rupees ($5.78 billion), well above the 305 billion rupees reported previously.

ArcelorMittal has also agreed to pay about $1 billion to creditors of two steel companies in which it had held a minority stake and to another in which CEO Lakshmi Mittal held a small holding. An Indian tribunal had demanded this.

One London-based analyst said the price in dollars per ton of capacity was about twice that proposed in ArcelorMittal’s bid for similarly sized Italian steelmaker Ilva.

ArcelorMittal has agreed to pay 1.8 billion euros for Ilva and will invest an additional 2.3 billion on productivity and pollution controls.

Shares in ArcelorMittal were down 2.8 percent at 24.32 euros by 1415 GMT, making them one of the weakest performers on the FTSEurofirst 300 index of leading shares .FTEU.

However, a note from Jefferies analysts said that investors appeared to be ignoring that ArcelorMittal was bidding in a joint venture and, with debt likely to make up two thirds of an offer, ArcelorMittal would drain free cash flow by only about $1.1 billion.

ArcelorMittal has said it will increase shareholder returns once it hits a $6 billion net debt target. Jefferies said it should still hit that target in mid-2019 regardless of an Essar acquisition.

Essar, which is being sold as part of an Indian corporate insolvency resolution process, was described by ArcelorMittal as a “compelling” opportunity to enter the high-growth Indian steel market.

The Luxembourg-based company has said it has a detailed plan to improve Essar’s performance.

Essar’s main plant, in the western Indian state of Gujarat, has stated annual capacity of 9.6 million tonnes but an actual maximum of 6.1 million tonnes because of production bottlenecks.

India plans to roughly triple domestic steel production to 300 million tonnes a year by 2030.

($1 = 72.6950 Indian rupees)

Reporting by Philip Blenkinsop; Editing by Jason Neely and David Goodman

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