ArcelorMittal, Nippon Steel Buy TK Steel USA

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Steel giant ArcelorMittal (MT) has signed a 50-50 joint venture pact with Japan’s Nippon Steel & Sumitomo Metal Corporation (NSSMY) to acquire ThyssenKrupp’s 100% interest in ThyssenKrupp Steel USA (TK Steel USA) for $1.55 billion. ArcelorMittal’s share rose 1.2% to close at $17.17 on Nov 29.

Calvert, Alabama-based TK Steel USA is a steel processing plant that holds a total capacity of 5.3 million tons including hot rolling, cold rolling, coating and finishing lines. The plant represents the most modern finishing facility in the world.

This acquisition is an important strategic fit for ArcelorMittal and it is expected to deliver $60 million of annual synergies. The buyers will finance the transaction partly by equity and partly by debt at the joint venture level. The deal, which is subject to customary regulatory and other approvals, is expected to close by the mid-2014.

The deal also includes a six-year agreement to purchase two million tons of slab annually from TK CSA. Rio de Janeiro, Brazil-based TK CSA is an integrated steel mill complex that uses market-based price formula. TK CSA agreement also holds an extension option for three year in addition to six years at more favorable terms to the joint venture, compared with the initial time period.

ArcelorMittal will be responsible for marketing on behalf of the joint venture. The rest of the slab balance will be supplied from ArcelorMittal plants in the U.S., Brazil and Mexico. The slab price to be received by ArcelorMittal will depend on the volume, price and cost performance of the joint venture.

ArcelorMittal holds an identified franchise business in the automotive market and the acquisition of TK Steel USA is expected to reinforce ArcelorMittal’s existing auto business in the U.S. The NAFTA (North American Free Trade Agreement) automotive market is expected to see a roughly 15% rise  in vehicle production over the next decade.

This transaction will also uplift ArcelorMittal’s position in supplying the NAFTA energy industry, which is expected to demonstrate growing demand for energy pipe and tube products due to increases in oil and natural gas exploration and production.

The newly formed joint venture is also expected to meet the growing needs, especially from Japanese car manufacturers, for ultra high tensile strength products with good formability.

ArcelorMittal currently carries a Zacks Rank #3 (Hold).

Other companies in the steel and related industries with favorable Zacks Rank are Companhia Siderurgica Nacional (SID) and United States Steel Corp. (X). While Companhia Siderurgica holds a Zacks Rank #1 (Strong Buy), United States Steel retains a Zacks Rank #2 (Buy).

ARCELOR MITTAL (MT): Free Stock Analysis Report

CIA SIDERUR-ADR (SID): Free Stock Analysis Report

UTD STATES STL (X): Free Stock Analysis Report

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