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ARCELOR MITTAL: DEAL IN US WITH CLEVELAND CLIFFS (ANÁLISIS BANCO SABADELL)

MTS has announced it has reached an agreement with Cleveland Cliffs (largest iron ore producer in the US, with which it has signed supply contracts) to sell to the latter its US assets for US$~1.4 Bn, of which US$ 505 M will be paid in cash and the remainder in shares in Cleveland Cliffs. Thus, MTS will receive 78 M shares in the company, which means that it will hold a ~16% stake. Additionally, MTS will receive 59 M preferred shares, which could be converted into 58 M Cleveland Cliffs shares. Thus, MTS’s stake in the company could reach 25%.
Separately, Cleveland Cliffs assumes net liabilities totaling US$~500 M (vs. US$ 7.85 Bn of net debt for MTS in 1H’20) as well as US$~1.5 Bn of pension obligations (vs. US$ 7.3 Bn for MTS as of YE2019). The EV of the deal would, therefore, be US$~3.4 Bn (~12% of MTS’s current value including the pension deficit).
We should point out that the assets being sold today by MTS are the ones in the US included in the NAFTA division. These assets accounted for ~15% of the tonnage and ~10% of total group sales in 2019, but only ~8% of EBITDA, and thus the EBITDA/Mt for the assets would be below the group average.
As a whole, we believe that the deal makes sense on the strategic level as it means greater concentration in the US market, as well as greater vertical integration thanks to Cleveland Cliffs’ iron ore assets. In this regard, potential cost synergies worth ~ US$150 M have been announced. MTS might continue to benefit from both factors indirectly given its stake in Cleveland Cliffs (~25% BS(e)). Furthermore, MTS is selling assets with an average profitability below the Group’s, keeping other quality assets, such as those in Canada, Mexico and Calvert, which are not included in the deal and the consolidation of which will remain unchanged.
On the financial level, although we are missing specific data on the assets in the US, the company states that it has sold at an average of ~6x EV/EBITDA in 2017-1H’20. This ratio would compare to the ~5x average for MTS over the same period. According to our estimates, the deal would have an impact of up to +8% on the valuation (the stock is currently up +8.3%). Separately, MTS will reduce its liabilities (net debt + pension deficit) by approx. 14%, which will help improve its rating (currently Ba1 from Moody’s; non-IG).
MTS has announced a share buyback programme worth US$ 500 M linked to this deal (4.5% of its market cap) that will start today and last until March of 2021.
The Company will hold a conference call a las 15:30 (CET) to unveil further details on the deal.