EUR 850.00 For Business Accounts Only

Morningstar | ArcelorMittal Takes a Big Step Toward Completing Its Proposed Acquisition of Essar Steel India

On Oct. 26, the committee of creditors behind Essar Steel India agreed to accept the acquisition terms proposed by ArcelorMittal and joint venture partner Nippon Steel and Sumitomo Metal. More than 92% of creditors voted in favor.

This represents a significant milestone for ArcelorMittal, as the bidding process has been a winding road with various starts and stops over the last year. ArcelorMittal had submitted its initial expression of interest to acquire Essar back in October 2017. The sale process has tested India's new Insolvency and Bankruptcy Code, which was established in 2016. At one point, ArcelorMittal's bid had been deemed ineligible by the creditors committee. However, the bid was later reinstated once the company cleared outstanding debts across two of its separate investees that had each defaulted on loans. The final step in the corporate insolvency process requires the approval of India's National Company Law Tribunal, which ArcelorMittal hopes to achieve by year-end 2018.

Our ArcelorMittal valuation model does not yet include the impact of the proposed Essar acquisition, as various objections still remain and its closure is not assured. However, this potential takeover reflects the company's legacy of strategically buying distressed assets and restoring profitability. Therefore, even though the required investment is substantial, we applaud management for leveraging its core competency while also driving growth. Our fair value estimates for ArcelorMittal are unchanged at $20 and EUR 17 per share. Our no-moat rating also remains intact.

The acquisition plan includes an up-front payment of $5.7 billion toward Essar's debt and an additional $1.1 billion investment in its operations toward the goal of boosting production and profitability. This compares to ArcelorMittal's current market capitalization of roughly $25 billion. ArcelorMittal plans to boost production to 8.5 million metric tons over the medium term versus Essar's current annual steel production of 6.5 million metric tons. The company's long-term aspiration is to increase Essar's annual finished steel shipment volumes to 12 million-15 million metric tons with further investment.