ArcelorMittal: It is hard to fault ArcelorMittal's decision to offload its stainless steel unit. With its parent focused on expanding its mining operations, the smallest of its divisions risked becoming a distraction. The spin off also clears the way for industry consolidation that ArcelorMittal is reluctant to lead.
Stainless steel increasingly looks like a misfit within ArcelorMittal. It contributed just 6 percent of the $9.3 billion of Ebitda the group has generated over the last four quarters. It is a specialised business requiring significant spending on research and development. And the industry is grappling with overcapacity, particularly in Europe. Of course, that alone is not a good reason for jettisoning the business. The longer-term outlook is healthy. Per capita, Chinese consumption of more basic steel products is just 30 per cent below that of developed markets, according to Credit Suisse. For stainless steel it is 90 per cent lower.
But ArcelorMittal is reluctant to wait. The company doesn't expect demand for stainless steel to return to pre-crisis levels until 2013. ArcelorMittal would rather focus on building up its mining operations, which will give it greater control over raw materials. The stainless steel unit could have become an unwelcome competitor for internal resources.
The business will get a fair start to its post-ArcelorMittal life. Its $1 billion of net debt equates to 1.8 times the $556 million of Ebitda the division generated over the last four quarters - less than the group's overall debt-to-Ebitda multiple of 2.4.
ArcelorMittal shareholders will receive one share in the stainless steel business for every 20 they currently own. Assuming the spin off is valued in the same proportion, its market capitalisation today would be $2.8 billion. Add in the debt, and the division's enterprise value will be 6.8 times Ebitda, some 15 per cent below its parent's current valuation.
This hardly suggests a hidden gem whose value is waiting to be unlocked. However, as a standalone entity, the stainless steel business should be in a better position to participate in the long-expected consolidation of the industry. With its focus firmly on vertical integration, ArcelorMittal has no interest in being a consolidator. But loss-making rivals are not in a position to buy. Creating a business with its own listing may help clear the way.