Paris - France's Usinor said yesterday it would acquire Luxembourg's Arbed and Spain's Aceralia for e3,4 billion (R24,5 billion) in an all-share deal to create the world's largest steel firm, with an estimated annual output of 46 million tons and sales of e30 billion.
The three made it clear that the need to rationalise lay at the heart of the merger, which comes as the European steel industry faces its toughest outlook for nearly a decade from global overcapacity and plunging prices.
Analysts said the deal would allow the companies to cut costs and capacity in Europe, give them the base necessary to follow the globalisation of their big customers and could also herald further consolidation of the global steel industry.
However, like last year's failed three-way aluminium merger between Pechiney, Alcan and Algroup, the combination is likely to come under the close scrutiny of competition authorities in Brussels.
"There is no doubt this is a nice combination, but there are uncertainties about restructuring and eventual asset sales, so we are tempering our enthusiasm at this point," said a fund manager at a large French bank.
Although announced as a three-way merger, the deal is effectively a takeover by Usinor of the two smaller firms, with the French group paying about e3,4 billion for the pair, based on Usinor's closing share price of e14,05 last week.
Under the all-share deal, the three said they would create a new group, called NewCo, in which Usinor shareholders would hold 56,5 percent, Arbed 23,4 percent and Aceralia 20,1 percent.
Aceralia shareholders would get eight shares in NewCo for each seven Aceralia shares held, Arbed holders would get 10 shares for each share held, and Usinor holders one share for each share held.
Shares in all three companies have been suspended since last week. Shares in the new group will trade in Paris, Brussels, Luxembourg and Madrid and the entity will have Usinor and Aceralia chairmen - Francis Mer and Joseph Kinsch - as co-chairmen.
The exchange ratios represent a 56 percent premium for Aceralia holders and a 57 percent premium for Arbed holders based on the average stock prices of the two companies over the past three months.
"These are substantial premiums, but I would argue they are justified because Aceralia and Arbed are both very weakly valued in relation to the sector," said Julien Onillon, an analyst at HSBC.
The trio said the deal was designed to bring big cost savings and suggested the possibility of plant closures.
Roughly e300 million in annual costs are expected to be cut by the end of 2003, rising to a total of e700 million by 2006. Investment savings are seen at e350 million over the 2002-2005 period.
"These gains are estimated based on the best performance of each company independent of the merger," the companies said.
"They will come in large part from the progressive rationalisation of production towards the most efficient sites."
Combined, the three groups will dwarf Japan's Nippon Steel, the present world leader, which produces about 28 million tons of steel each year and with which Usinor already has a strategic alliance.