The hedge funds protesting maltreatment at the hands of Mittal are no Aunt Agathas. They are mostly sophisticated investors who collect fantastic fees—normally a 2% management fee and a 20% carry—precisely because they are supposed to do their homework. That means reading reams of very boring technical documents, and getting legal advice if in doubt.
By that yardstick, the funds who hung on to Arcelor shares after its takeover by Mittal last year are protesting too much. If they had taken the tender offer, they would have received 11 Mittal shares for every seven Arcelor shares they held. Some 94% of shareholders took that offer. But 6% held out. Now Arcelor Mittal, as Mittal was renamed, is forcing through a merger with Arcelor. The rump Arcelor minority are being given only eight Arcelor Mittal shares for every seven Arcelor shares they hold. Three shares have vanished.
This may look unfair. But last July, Mittal made clear that anybody who didn’t tender their shares in the takeover would be swept up in a subsequent merger. What’s more, it said that the subsequent exchange ratio would be consistent with the ‘value’ of the tender offer at the time that it closed. That’s different from promising the same exchange ratio.
Mittal now isn’t quite doing what it promised. The deal closed on 1 August. At that time, the Mittal shares were worth €27 (Rs1,485) and the value of its offer was €42-43 a share. The sharp rise in Arcelor Mittal shares since then means it can offer a lower exchange ratio and still give the same value. Given that its own shares are now coincidentally €42-43, it could have, theoretically, got away with parity. In fact, it has erred on the side of generosity: The eight-for-seven ratio is worth €48-49.
Admittedly, Mittal’s statement about how it would treat Arcelor shareholders in a subsequent merger wasn’t exactly the easiest thing to find. It was on page 30 of the second supplement to an information document. It was also written in complex legalese. But that’s precisely the sort of document that hedge funds are supposed to read.
The funds are fuming either because they didn’t read the document or misread it or thought they could still bamboozle Arcelor Mittal into offering them the old exchange ratio.
The rump Arcelor shares never rose to the full price implied by an 11-for-seven ratio. But earlier this week, they were trading at €58-59. No wonder the funds don’t like the idea of a deal worth nearly 20% less. But they don’t deserve much sympathy.