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By William Patalon III
Money Morning/The Money Map Report
India's Essar Steel Ltd. and several Russian steelmakers are competing suitors for the Baltimore-region Sparrows Point steel mill now owned by ArcelorMittal SA (MT), India's Financial Express newspaper reported yesterday (Thursday).
"The most prominent suitors continue to be Russian producers, although India's Essar Group also has been mentioned prominently, according to market sources," the newspaper said.
The Financial Express cited the trade journal, the Metal Bulletin (MB), as the source of its report. The newspaper noted that Essar has been the most recent company to express an interest in the historic Maryland steel mill, and has started to negotiate with the Luxembourg-based ArcelorMittal.
ArcelorMittal had earlier signed an agreement to sell the mill to a consortium led by the Chicago Heights, Ill.-based Esmark Inc. (ESMK), but the deal fell through when the company couldn't pull a financing package together.
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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.
"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."
A spokesman for Essar told the Financial Express that the company was open to good investment opportunities. But he would not comment on specific proposals or suitors.
Essar already owns Algoma Steel Inc., based in Sault Ste. Marie, Ontario, and the Minnesota Steel Industries LLC operations that are set to begin construction on the so-called "Minnesota Iron Range."
It put the mill back on the market, with various potential buyers looking into a purchase, ArchelorMittal said. Investment bank Morgan Stanley (MS) is managing 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 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 became the world's largest steel mill by the middle part of the 20th Century – stretching four miles from end-to-end and at its height and 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 steel producer 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.
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 Esmark Inc.
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 Monday.
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:
The Financial Express:
Essar Joins Race to Buy Sparrows Point Mill.
The Associated Press:
Citi upgrades ArcelorMittal (MT) to Buy
Mittals to Make $935 Million From Shares
Sparrows Point Shipyard
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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.