Brussels/London: World No. 1 steelmaker ArcelorMittal will spin off its stainless steel division, a move that may spark consolidation in a European industry burdened by over-capacity.
A listing on Euronext early next year may provide the impetus needed for a renewed push to merge the operation with a major player like Spanish group Acerinox or Finnish company Outokumpu Oyj, analysts said.
ArcelorMittal first said in July it might separate stainless steel—which accounted for 7% of 2009 group sales—from its core operations after years of seeking a merger for the unit to slash costs.
But today the group revealed it would hand out shares in the unit, which had 2009 sales of $4.2 billion, to investors on a 1-for-20 basis in the first quarter of next year.
Nomura analyst Jeff Largey estimates a market capitalisation for the ArcelorMittal unit of about $2.8 billion, and including about $1 billion in net debt, an enterprise value of about $3.8 billion.
That compares to a market value of $3.9 billion for Acerinox and $3.3 billion for Outokumpu.
Global demand for stainless steel—used in everything from kitchen pots and cutlery to car trim and surgical instruments—is driven by Asia, while stagnant consumption in Europe has led to a glut of capacity there.
“Given the overcapacity in the industry, there is a need for consolidation and rationalisation. The entry of ArcelorMittal Stainless as an individual unit, separately listed, could serve as a catalyst for that,” Largey said.
“One thing it does is it puts another multiple into the market. Now you will have three separately listed stainless producers. So it helps from that perspective, from a valuation point of view.”
Investors have been hoping for years that merger activity among the main players such as Acerinox, the world’s biggest stainless producer, and Outokumpu would lead to the closure of some European smelters.
Although Acerinox is biggest globally, in Europe it has an 11% market share versus 23% for Outokumpu, another analyst said.
ThyssenKrupp, Germany’s biggest steelmaker, has a stainless steel unit it wants to restructure and, although it is not listed separately, it could also join in any consolidation.
ThyssenKrupp is the biggest stainless steel player in Europe with 31% of the market versus ArcelorMittal’s 22%, said the analyst, who declined to be named. Due to those market shares, mergers might run into anti-trust problems.
ArcelorMittal’s stainless steel business employs around 11,000 people, or about 4% of the group’s total workforce.
“It (demerger) is to create value, it is part of the business that can do better on its own,” an ArcelorMittal spokesman said.
ArcelorMittal said it expected the spin-off to result in a non-cash impairment charge of about $800 million, adding the divestment would not affect its leverage ratio.
The Mittal family will retain a 40% stake in the unit, the spokesman said.
ArcelorMittal shares were virtually unchanged by 1050 GMT, in line with a flat FTSEurofirst 300 index of leading European shares.