Cleveland-Cliffs (CLF) has inked a deal with the world’s largest steelmaker ArcelorMittal to acquire substantially all the operations of ArcelorMittal USA LLC and its subsidiaries for about $1.4 billion. Cleveland-Cliffs stock is rising 6.1% in the pre-market trading hours today.
Once the deal closes, Cleveland-Cliffs will become the largest flat-rolled steel producer in North America, with combined shipments of about 17 million net tons. The company will also be the largest iron ore pellet producer in North America, with 28 million long tons of annual capacity. Last year, Cleveland-Cliffs acquired AK Steel, an automotive and industrial parts maker, for $3 billion.
The $1.4 billion deal with ArcelorMittal (MT) will involve an upfront cash payment of $505 million by Cleveland-Cliffs and the remaining payment will be made through a combination of 78.2 million shares of Cleveland-Cliffs common stock, and a non-voting preferred stock with an aggregate value of about $373 million.
Cleveland-Cliffs will also assume the liabilities of ArcelorMittal USA, including net liabilities of about $0.5 billion and pensions and other post-employment benefit liabilities valued at $1.5 billion
Commenting on the deal, Lourenco Goncalves, CEO of Cleveland-Cliffs said, “The acquisition of ArcelorMittal USA amplifies our position in the discerning automotive steel marketplace, and further improves our position in important U.S. markets such as construction, appliances, infrastructure, machinery and equipment.”
“It also adds to our strong legacy raw material profile and growing finishing capabilities. The transaction will enable us to become a more efficient fully-integrated steel system, with the ability to realize all of our operational and financial goals.”
The acquisition is expected to be EPS accretive and reduce Cleveland-Cliffs leverage from 4.3x to 3.6x on a proforma 2019 adjusted EBITDA basis, including the impact of estimated annual cost savings of about $150 million. The deal is also expected to increase the company’s liquidity substantially due to an increased ABL (asset-based lending) borrowing base.
Currently, the Street has a Hold consensus for Cleveland-Cliffs with 1 Buy, 2 Hold and 1 Sell rating. Following a recent Basic Materials conference, Credit Suisse analyst Curt Woodworth raised his price target for Cleveland-Cliffs to $5.25 from $4.75 but retained a Hold rating based on valuation.
The analyst commented, “Steel and iron ore prices have surprised to the upside in 3Q-20, owing to very strong demand recovery in China. For CLF, the commercialization of HBI and commercial / operational improvements at AK Steel set the stage for sharply better steel-based cash flows in 2021.” (See CLF stock analysis on TipRanks)
Cleveland-Cliffs stock has declined 30% so far in 2020 and the average analyst price target of $5.94 reflects a modest upside of 1% in the coming months.
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