The prospective combination of steel giants Arcelor SA and Mittal Steel Co will likely accelerate the ongoing wave of consolidation in the global steel industry.
"The stars are really aligned for additional transactions over the next six months to 12 months," said Mark Parr, an analyst with KeyBanc Capital Markets. "We are seeing consolidation activity from the very smallest to very largest producers."
Late on Sunday, Luxembourg-based Arcelor said its board would recommend shareholders approve Netherlands-based Mittal Steel's takeover bid.
The merger between the world's No. 1 and No. 2 steelmakers by crude steel output would create a 110 million tonnes per year behemoth, responsible for 10 percent of the world's steel production and three times larger than its nearest competitors.
According to analysts, future mergers will be attempts to compete with the scale and diversity of the merged Arcelor-Mittal.
"Companies will be searching for new segments," said analyst Cristiane Viana at Rio de Janeiro-based brokerage Agora Senior. "With this deal, global consolidation should be intensified."
According to Viana, select Brazilian steelmakers would make attractive targets because of their profitability and access to the world's highest-quality iron ore.
The Arcelor-Mittal resolution sent steel stocks higher around the world, including Brazilian steelmakers Usinas Siderurgicas de Minas Gerais, or Usiminas, and Companhia Siderurgica Nacional (CSN).
Analysts said CSN and Usiminas are examples of the type of steelmaker likely to draw interest in the global consolidation move, but there are difficulties to any acquisition of the two companies.
"Usiminas and CSN are always acquisition targets," said Monica Araujo, an analyst at investment bank BES Securities in Rio de Janeiro "It's just a question of price."
Usiminas has a complicated share structure, with a controlling group led by Japanese steelmaker Nippon Steel. Given that the company enjoys solid profit margins and holds a 51 percent share of the flat-steel market in Brazil, Nippon is more likely to increase its stake in Usiminas than be bought out, Agora Senior's Viana said.
The industry would likely see further consolidation if steelmakers weren't so highly valued, crimping possible returns, executives at Brazilian long steel maker Gerdau said in April, when the company announced its purchase of US minimill Sheffield Steel.
"To buy a large steel operation of 10 million to 20 million metric tons, well located near the automotive and civil construction industries, you can't get a good return on capital employed," company Vice President Frederico Gerdau Johannpeter said. "It is simply overvalued."
For example, investors have sent shares of the major Brazilian steelmakers soaring in the past 12 months on improving domestic sales and international prices. Gerdau shares are up 17 percent so far this year, and more than double in the past 12 months.
KeyBanc's Parr said several factors drive the consolidation push, including access to capital and reasonable valuations in a strong market. However, he said that how well the industry weathers the next economic downturn will provide insight as to whether the steel sector consolidated enough.
Whatever the type of consolidation, a deal between the top two steelmakers proved that it's currently open season on the steel sector.
"Any steel company could be a target," said Viana of Agora Senior.
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