Nickel and diming

Last Updated: Thu, Nov 01, 2012 19:52 hrs

ArcelorMittal is buying time by melting down its dividend. The cutback is a small but logical step as the world’s biggest steelmaker tries to shore up its balance sheet without asking shareholders for new money. The aversion to a rights issue is understandable. For a start, raising new equity is not best done at an industry nadir. And, in this case, it could strain the Mittal family — the tycoons who run the company and own 41 per cent of its stock.

The dividend will be cut by 73 per cent, from $0.75 to $0.20 per share. With the company’s US shares trading at $15.19 at 1400 GMT on October 31, the forward dividend yield falls from what now looks like an indulgent 4.9 per cent to a slender 1.3 per cent.

Lenders will be pleased with the $850 million which no longer leaves the company, but this parsimony will not be enough to placate jittery rating agencies. In August Moody’s demanded $5 billion of debt reduction within six months, or said it would follow Standard & Poor’s in cutting the group to “junk”. For a company with lots of creditors, that move would complicate life considerably, even if the absolute increase in borrowing costs would be manageable.

Still, the dividend reduction should help persuade Moody’s and Fitch that ArcelorMittal means business. Selling a minority stake in the company’s Canadian iron ore operations could be the next milestone. But ArcelorMittal must judge whether more value is preserved by selling off assets at less-than-perfect prices, or by raising equity, also at low valuations. Forging a third way — such as selling a strategic stake to a sovereign fund willing to bet on cyclical recovery — looks like a long shot.

One deciding factor, hard to judge from the outside, is whether the Mittals would have to endure dilution in any widespread capital raising, as they did in 2009. Perhaps subsequent dividends have provided enough liquidity to maintain their stake. But any non-participating shareholders, Mittal or not, would probably suffer steep dilution. And, the timing would be dire, just as Arcelor points to troughs in Chinese industrial growth and raw-material prices.

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