DealTalk: Is Arcelor bid for Baffinland really worth more?

By Pav Jordan

TORONTO (BestGrowthStock) – Why would ArcelorMittal (ISPA.AS: ) make a counteroffer for Baffinland Iron Mines (BIM.TO: ) that on face value appears to be worth less than its rival’s bid?

At least two sources close to the proceedings say the world’s largest steelmaker knows exactly what it’s doing. Indeed, Arcelor’s C$1.25-a-share ($1.23) bid, which came in response to a C$1.35-a-share offer from Nunavut Iron Ore, is a lot sweeter on second glance, the sources say.

Arcelor, which made its latest offer for the Canadian junior miner on Saturday, also lowered the minimum number of shares needed to complete the deal to 50 percent plus one share while pledging to purchase all shares tendered.

That’s key to the value inherent in the Luxembourg-based steelmaker’s offer, the sources say.

Arcelor also raised the break-up fee that would be paid if the deal falls through, while Baffinland’s board, which has endorsed Arcelor’s bid, adopted a takeover defense against other rivals.

Nunavut Iron, which controls about 10 percent of Baffinland shares, has offered C$1.35 a share for 50.1 percent of the company’s shares.

In a Sunday statement it asserted again that its offer is superior and said it would ask regulators to block the rights plan. (ID:N19174632: ) Nunavut was not immediately available for further comment.

ArcelorMittal, with lockup agreements with key shareholders and Baffinland directors holding about 25 percent of the stock, says it’s willing to pay only C$1.25 per share, but for 100 percent of the company stock.

“The Nunavut bid is for only 50.1 percent of the shares, so if you are a Baffinland shareholder you get the C$1.35 a share for 40 percent of your shares and whatever the shares trade at for the remainder,” said one source with close knowledge of the Arcelor offer.

“So if you just do the math in weighted terms, for the Nunavut bid to be above C$1.25, shareholders would have to assume they’ll get at least C$1.10 on the open market … which is way above where it was trading before these bids materialized.”

Baffinland stock touched a low this year of around 35 Canadian cents a share.

The company is seeking partners to help it develop a deposit in the Canadian Arctic that is said to contain enough iron ore to supply the entire European market. But it would take C$4 billion to develop the deposit.

After Nunavut made its first bid for the company, for 80 Canadian cents a share, the stock hit a 23-month high of 94 Canadian cents.

In November, ArcelorMittal followed that with its own bid, a friendly offer worth C$1.10 a share, locking up support for its bid from Baffinland’s biggest shareholder, Resource Capital Funds, as well as the company’s directors.

LOCK-UP AGREEMENTS

The source close to the deal said those lock-up agreements helped Arcelor lower the number of shares needed to proceed because there was more certainty in completing a deal.

The bid also put an end to other talks between Baffinland and Arcelor to develop the Mary River project together.

Supporters of the ArcelorMittal offer also say the stock might sink back to pre-bid levels if shareholders tender to Nunavut.

“So if you have a million shares, you can cash in only half of them to the offer,” said another source with knowledge of the offers.

“The C$1.35 a share is something completely uncertain, given that the shares were trading at 55 cents before these bids were launched,” said the first source.

If shareholders tender their shares to the Nunavut bid, and then get 80 Canadian cents for each of their shares on the open market, he said, they would receive a net value on their shares of some C$1.13 a share.

($1 = $1.01228 Canadian)

(Editing by Frank McGurty)

DealTalk: Is Arcelor bid for Baffinland really worth more?