New Delhi: European strategist at Kepler Equities, Edmund Shing says that the Mittal-Arcelor talks are at an advanced stage. It has a 75 per cent chance of going through. He further adds that it is more likely that Severstal will be left out.
Excerpts from CNBC - TV18's exclusive interview with Edmund Shing:
Q: What is the buzz in Paris? Is this deal likely to be announced on Sunday?
A: Yes. If one looks at the official announcements, the Arcelor board is due to meet this weekend, indeed on Sunday to decide between the rival bid from Mittal and from the Russian company Severstal.
Severstal recently improved their offer in a merger by reducing the amount of shares that they would need in order to do the deal, effectively raising the price for the Arcelor combination.
However recent developments in France suggest that Mittal is willing to come back with a higher offer.
Indeed the talks with Arcelor have got to such an advanced stage that they seem to have decided all the senior appointments, such as who would be the chairman of the combined Arcelor-Mittal company, who would be the head and so on.
They have really started taking decisions on the management, which suggests that the talks are at a very advanced stage.
If one looks at the French newspapers today, what they suggest is that these decisions have already been made.
The gap and the difference remains more on simply on price, where the Arcelor CEO Guy Dolle is looking more for a price like €43 and not far away from the share buyback level that they were going to execute at €44.
However, Mr Mittal is not willing to offer such a high price. His currently bid prices are low, around 36-37, so 43 would be another big jump above.
Maybe somewhere on the 40 mark might be appropriate. We think the probability of the deal being done is actually rising by the day.
Q: So will it be Mittal and Arcelor or will it be Mittal-Arcelor and Severstal or is Severstal going to be left out in the cold?
A: From Mr Mittal's point of view there is little attraction in including Severstal in the deal.
They are a mid-sized Russian player. They don't really bring in anything unique. I think this is a defensive movement by Arcelor, the friend of Mr Mittal or atleast to encourage a higher bid level.
It is more likely that, should Mittal and Arcelor tie-up, Severstal will be left out in the cold. Then they will have to look for another acquisition potentially elsewhere in Europe.
Q: If indeed the Mittal deal is up to about €40 per share, for a shareholder of Arcelor, which one strikes you as more attractive now?
A: If the deal was €40 per share in cash and in shares from Mittal, and if on top of that there are concessions on corporate governance that has been printed in newspapers, that is to say that the Mittal family would perhaps have less control over the company.
There would be more independent directors and more of the Arcelor management would be kept on board, atleast initially for the first one or two years.
That might be enough to please institutional shareholders who would then in my view clearly prefer the Mittal deal.
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Q: As someone who is analysing the industry, do you expect to see a lot more strength or muscle in terms of pricing for steel going ahead?
A: I think Mittal -Arcelor would be an enormous combination, so yes I would expect prices to stay somewhat strong, given that I do not see a big pull back in coal, remember coal is still a scarce resource.
Secondly if you look at iron ore, it is also another fairly scarce resource. We have a lot of control over from BHP Billiton. The real question mark is on global economic growth.
Obviously if there is a big economic slow down led by the US, that can have a big impact on consumption and therefore on final demand for steel goods namely cars etc, that of course would have a negative impact on the steel prices.
For me it is a better mode of global growth. My feeling from a strategic point of view is that yes, US will slow down if the consumer is too slow.
Secondly, the Chinese are trying to slowdown their economic growth from an extremely high level, probably an unexplainable high level.
The conclusion for me is that I believe that global growth would still be decent and that would be enough to keep the supply-demand balance in favor of the steel makers atleast for a bit longer.
So I think steel pricing will stay decent for the foreseeable future.
Q: Is that because in India we see a number of small and medium sized steel company shares shooting up today after this deal looks a little closer. Do you think the steel industry will have a better control on prices or is it because you expect more mergers and acquisitions to happen?
A: It is more the second issue. Yes pricing will remain decent but it is really very good. It is more a question of keeping pricing at high levels for maybe a bit longer but the real play is obviously that people are going to say what's next.
The steel industry has consolidated a lot in Germany. The Arcelor Mittal deal would be another huge move within this consolidation, which Mittal has led largely in the US.
On a global basis this can go on further and my guessing is that people will look for that to continue. For me the second tier players like Severstal, Evraz in Russia will look to move like a chorus from Europe, if this merger at all happens, perhaps to India.
Q: Unless Mittal and Arcelor really fall out of the price, is this deal almost as good as through?
A: I think it has a very good chance. The chance is certainly much higher than the 50 per cent that I thought a few days ago.
Q: Would you put a number to it now?
A: Probably 75 per cent atleast.
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