By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Russian steelmaker OAO Severstal said today (Friday) that it's agreed to acquire ArcelorMittal (MT) SA's historic Sparrows Point steel mill near Baltimore, in an $810 million deal that will expand its U.S. reach.
It expects to conclude the all-cash deal in the second quarter. Money Morning reported just yesterday (Thursday) that major global steel firms from both Russia and India were seriously interested in acquiring the sprawling mill that for years was operated by the former Bethlehem Steel Corp.
"We expect to realize synergies in Sparrows Point and with [Severstal North America] that will fuel increased production and profitability," Chief Executive Officer Alexei Mordashov said in a statement. "We remain committed to growth in North America and believe in the long-term promise of the U.S. market; we're confident that this acquisition will create value for our shareholders while strengthening our U.S. platform as a whole."
The transaction must still be approved by the U.S. Justice Department and some other regulatory agencies. It was the Justice Department that ordered Mittal Steel Co. to divest the Sparrows Point facility when it announced the merger with rival Arcelor SA.
According to a report today by Thomson Financial News, Severstal has agreed to enter into a collective bargaining agreement with the United Steel Workers union, although the company provided no additional details.
Thomson said that Sparrows Point currently has an annual productive capacity of 3.6 million metric tons of steel, and shipped 2.3 million metric tons of finished steel products last year.
The Cherepovets, Russia-based Severstal is launching a five-year capital investment program to improve the plant's operations. With 2007 revenue of $15.2 billion, free cash flow of about $3.7 billion, and total steel production of 17.5 million metric tons, Severstal is one of Russia's biggest steelmakers.
The company expects the Sparrows Point facility to contribute to its overall bottom line within a year and to operate closely with its existing operations in Mississippi and Michigan.
A List of Contenders
A day ago, published reports stated that several Russian steelmakers and India's Essar Steel Ltd. were all competing for the Sparrows Point plant. India's Financial Express and the global industry trade journal, the Metal Bulletin (MB), said that Essar was merely the latest addition to the list of suitors interested in the mill, though also noting that Essar had started negotiations with the Luxembourg-based ArcelorMittal.
ArcelorMittal had earlier signed an agreement to sell the mill to a consortium led by Esmark Inc. (ESMK), but the deal fell through when the Wheeling, W.V.-based Esmark couldn't pull a financing package together.
It put the mill back on the market, with various potential buyers looking into a purchase, it said. The U.S. Justice Department in August 2006 moved to block the merger of Arcelor SA and Mittal Steel Co. NV based on the contention that it would reduce competition for tin mill products in the eastern United States. Mittal was ordered to sell the Sparrows Point plant to allow its merger with Arcelor to gain Justice Department approval, the newspaper said.
Once that happened, Russia's Severstal, Evraz Group SA and OJSC Novolipetsk Steel and India's Essar entered the bidding for Sparrows Point. Most of the suitors had inspected the property.
"Essar has been in, and so have Severstal and Evraz," an industry source with knowledge of the negotiations with Arcelor told the Metal Bulletin. "They all want it for the same reason: They see this market as a good one."
Investment bank Morgan Stanley (MS) was brought in to manage the sale.
ArcelorMittal, formerly Mittal Steel Co. NV, is a global steel producer. The company has steelmaking operations in 26 countries on four continents, including 64 integrated, mini-mill and integrated mini-mill, steelmaking facilities. Mittal Steel produces flat-steel products - including both sheet and plate steel - and so-called "long" steel products as bars and rods. It also produces stainless-steel products.
Although ArcelorMittal shares remain below their 52-week high of $83.88, they have risen nearly 20% since the end of January, helped by strong surges in commodity prices. The shares closed Thursday at $74.09.
The Rise and Fall of Sparrows Point
In the right hands, the Sparrows Point mill could be a solid property.
The mill was started by Maryland Steel in 1887. It was acquired by Bethlehem Steel in 1916 and by the middle part of the 20th Century was the world's largest steel mill: It stretched four miles from end to end and at its height employed more than 50,000 workers. The traditional "open-hearth" method it used to produce steel ingots was both labor- and energy-intensive, which would come back to haunt the company when the industry changed in the late 1980s and early 1990s.
Before that, however, the Sparrows Point plant of the Bethlehem, Pa.-based steelmaker enjoyed many high-profile successes: Steel from the mill ended up being used for girders in the Golden Gate Bridge, for cables in the George Washington Bridge, and was a vital part of war production during both World Wars.
The huge mill also had a shipyard attached. Shipbuilding began in 1891. And through the years, under Bethlehem's stewardship [and known as the Bethlehem Sparrows Point Shipyard], the ship facility became part of a series of shipyards and produced tugboats, coastal passenger ships, dredgers, cargo ships and even some U.S. Navy destroyers. It also serviced and repaired ships and manufactured industrial products.
In World War II, the shipyard operated as part of the government's Emergency Shipbuilding Program. In one of several deals through the years, the other shipyards were divested.
By 1961, the mill was producing more than 670,000 tons of steel annually. But changes in the steel industry, including a rise in imports and the emergence of so-called "mini-mills" [which use simpler oxygen furnaces and recycled scrap metal] started and then exacerbated the competitive decline of the Sparrows Point steelmaking complex in the 1980s and 1990s.
In the latter part of the 1990s, Bethlehem invested nearly $1 billion in the facility in an effort to wrest back some of its competitiveness, but plunging steel prices from escalating foreign competition made it impossible for the vertically integrated steelmaker to compete.
Bethlehem spent millions re-lining the Sparrows Point blast furnace. It invested in a new mill for the production of cold-rolled steel. It also modernized other, existing facilities. And it slashed its largely unionized work force by the thousands through buyouts and job-reduction actions.
The Sparrows Point plant is now owned by Mittal Steel following its acquisition of Bethlehem Steel successor company International Steel Group in 2005.
Court-Ordered Divestiture
Morgan Stanley has started soliciting bids from prospective buyers of the plant, said Joseph G. Krauss, a Washington lawyer who was appointed by a federal judge in August to oversee the sale of the Sparrows Point steel mill.
Back in February, Archelor - then called Mittal Steel - agreed to divest the Sparrows Point mill in order to resolve U.S. Justice Department antitrust concerns that its $41 billion buyout of Arcelor SA would give the merged venture far too much muscle in the tin-plated steel market.
In December, an agreement that called for E2 Acquisition Corp. to buy Sparrows Point for $1.35 billion fell apart over what Mittal said was E2's inability to put together the required financing. E2 is an international investment group led by the Chicago Heights, Ill.-based Esmark Inc. (ESMK).
ArcelorMittal Upgraded
In January, Citigroup analyst upgraded ArcelorMittal shares to a "Buy" from a "Hold." In doing so, the Citi analyst said "we believe that the risks to raw material prices are on the upside and will shift ArcelorMittal further down the cost curve [allowing improved future profitability compared to its peers]."
London-based billionaire Lakshmi Mittal, the steel tycoon who heads the world's largest steelmaker, and his family will make $935 million in share dividends from their stake in ArcelorMittal this year, according to figures the company published back in late January.
Mittal ranked fifth last year on Forbes magazine's list of the world's wealthiest people, with an estimated fortune of $32 billion.
Born in India [he now lives in Britain's most expensive house], he led Mittal Steel Co.'s battle for control of the Luxembourg-based Arcelor in 2006. That battle led to the combination of the world's No. 1 and No. 2 steelmakers into a Global Titan that will control fully 10% of the world's steel production, putting it well ahead of Japan's Nippon Steel Corp. (PINK: NISTY). The newly combined company has $80 billion in sales, with operations in more than 60 countries and employs 330,000.
Mittal is the chief executive officer.
This year, shareholders will see four quarterly dividends of 37.5 cents per share [a total of $1.50 annually].
Profits in the third quarter alone were $3 billion, up 36% from the year before.
With their 44% stake, or 623.62 million shares, members of the Mittal family are the company's biggest shareholders. That will give them $233.8 million in dividend payouts per quarter - or $935 million over the course of the year.
News and Related Story Links:
- Forbes.com/Thomson Financial News:
Severstal to acquire ArcelorMittal's Sparrows Point mill for $810 Million.
- The Financial Express:
Essar Joins Race to Buy Sparrows Point Mill.
- The Associated Press:
Morgan Stanley managing steel mill deal
- StreetInsider.com:
Citi upgrades ArcelorMittal (MT) to Buy
- MSNMoney.com:
Mittals to Make $935 Million From Shares
- Forbes.com:
Lakshmi Mittal
- Wikipedia:
Lakshmi Mittal
- Wikipedia:
Sparrows Point Shipyard
- Wikipedia:
Sparrows Point
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.