The takeover bid revolving around Baffinland Iron Mines Corp. between ArcelorMittal and Nunavut continues. The steel giant, ArcelorMittal (MT) has been trying to acquire 100% of Baffinland and is currently offering C$1.40 a share, valuing the company at about C$550 million ($550 million) as it pursues its undeveloped iron ore deposit in Canada’s Arctic. The bid is due to expire on January 10.

Rival, Nunavut Iron Ore Acquisition Inc. (Nunavut), backed by private equity and a Canadian management team, is also offering C$1.45 a share, but for 60% of the company. The bid includes a proposed warrant that would allow shareholders to earn partial share in the new company.

ArcelorMittal announced that it would not raise its bid any further and stated that Nunavut’s bid is coercive, as it provides no certainty and transparency to shareholders.

The two companies have fought for control of Baffinland since September and trading offers for the Canadian iron ore explorer had nearly doubled by the year end.

At stake is the Mary River project, a vast, high-grade iron ore deposit located in the Canadian Arctic. According to media reports, it holds enough ore to meet all of Europe’s needs for years, but developing the mine will involve major logistical and environmental challenges.

Even though the total price tag is lower, ArcelorMittal’s 100%  takeover offer is much bigger than Nunavut’s 60% offer. Moreover, Nunavut’s partial offer will leave shareholders with the prospect of holding thinly traded shares subject to further financing and execution risks.

Whereas, the ArcelorMittal offer for 100% of Baffinland shares eliminates all uncertainty with respect to future financing and costs of the Mary River project, dilution arising from the financing of the project, and the future trading value of Baffinland shares.

For ArcelorMittal, which aspires to be about 80% self-sufficient in iron ore supply, a successful bid would mean more direct access to the key raw material, which is a significant issue, given tight global supplies and healthy demand from the Chinese steel mills.

With cash and cash equivalents of $3.5 billion at the end of September 2010, we believe ArcelorMittal has plenty of ammunition to fight for the bid.

Currently, ArcelorMittal has a Zacks #3 Rank (Hold) for the short term and a Neutral recommendation for the long term.

 
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