After years of seeking a cost-cutting merger in stainless steel, ArcelorMittal is giving up the fight and says it wants to spin off its activities instead.
Analysts see no reason to regard the move as the precursor to long-awaited combinations in the competitive European sector, which remains burdened by overcapacity in the durable metal whose biggest use is in kitchen pots, pans and cutlery.
ArcelorMittal, the world's biggest steel maker, said its stainless division could be a separately listed company in the next six to 18 months, subject to regulatory approval.
The new firm, present in Europe and Brazil, would be free to pursue its own growth strategy and focus more on its specialty products. But Chief Financial Officer Aditya Mittal conceded ArcelorMittal had tried to consolidate the business in the past few years without success.
"The stainless steel business needs consolidation primarily because we have a situation of overcapacity in Europe," he said.
Such a consolidation still seems a way off.
Analyst Andrew Snowdowne at UBS said he did not feel the problem of structural overcapacity in stainless steel was about to be fixed.
ThyssenKrupp AG, Germany's largest steelmaker, said late last year it was committed to developing its stainless business alone, having found tie-up options would not create value for investors.
That would leave global leader Acerinox SA of Spain and Finland-based Outokumpu Oyj as possible consolidation players.
NO EASY TARGET
But neither would be easy to acquire -- Finland owns 30.85 percent of Outokumpu while Acerinox has key shareholders who would need to be won over.
That would leave either company the option of attempting to ally with or buy ArcelorMittal's business. An acquisition, however, would not be cheap.
Analysts estimate the ArcelorMittal unit is worth some $3.5 billion to $4.0 billion, based on a sector enterprise value to forecast 2011 EBITDA multiple of 6.5 to 7 times, against about 5 times for plain steel.
The price, close to the market capitalization of Acerinox, may therefore be prohibitive. Furthermore, it could be a more appealing prospect for a producer to let a rival face the costs of cutting capacity and restructuring, then soaking up the sector-wide gains.
"It would benefit the sector if capacity were cut, but no one wants to volunteer," said a Nordic-based analyst who declined to be named. "I tend to think nothing will happen."
Erkki Vesola, analyst at Swedbank Markets in Helsinki, said anti-trust authorities in Brussels could also torpedo any European alliance.
That would leave only an Asian peer, such as POSCO (005490.KS) or a Chinese steel conglomerate as a potential suitor. Yet such companies might prefer to concentrate on booming emerging markets than on expanding in a problematic Europe.