Bloomberg News

Nippon Steel Gets Clearance for Take Over of Sumitomo Metal

December 14, 2011

(Updates with merger plans in second paragraph.)

Dec. 14 (Bloomberg) -- Nippon Steel Corp., Japan’s largest steelmaker, received clearance for its 685 billion yen ($8.8 billion) all-share purchase of Sumitomo Metal Industries Ltd. to create the world’s second-biggest steelmaker.

The Japan Fair Trade Commission announced its approval of the deal at a press conference in Tokyo today. The merger will be completed by October next year, the companies said today. Nippon Steel is offering 0.735 of its shares for each Sumitomo Metal share, they said in September. Including assumed debt, the transaction is worth about 1.7 trillion yen.

Nippon Steel and Sumitomo Metal want to combine to counter intensifying competition from Asian and European rivals in what may be the country’s largest non-bank takeover. That dovetails with government efforts to encourage takeovers to boost growth in the world’s third-largest economy.

“It’s a positive move as Japanese companies face rising global competition,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. “It’s necessary to have an industrial policy to push major companies to consolidate so they can expand economies of scale.”

Nippon Steel closed unchanged at 194 yen and the shares have declined 34 percent this year. Sumitomo Metal rose 0.7 percent to 140 yen and is down 30 percent in 2011. The company will be de-listed from the Tokyo Stock Exchange by Sept. 26 next year. The FTC announcement was made after the market close.

Keeping Up

Tokyo-based Nippon Steel is paying 9.8 times earnings before interest, tax, depreciation and amortization, versus a median of 8.2 times for 10 deals over the past seven years, based on the total value of the offer, according to data compiled by Bloomberg. The combined company will be known as Nippon Steel & Sumitomo Metal Corp.

The new company will produce as much as 70 million metric tons of the alloy annually within ten years as it increases its presence in emerging markets in Asia including China and India, as well as in Brazil. Combined, they produced 48.3 million tons last year, according to the World Steel Association.

Shrinking Market

Steelmakers in Japan need to seek more export growth as their domestic market shrinks as the nation’s population ages. Nippon and Sumitomo control 44 percent of the domestic market, according to Bloomberg calculations, and together they account for about 3 percent of global crude steel output, the companies said.

Nippon Steel was knocked off its perch as the world’s No. 2 steelmaker in 2009, falling to sixth place behind market leader ArcelorMittal, Baosteel and South Korea’s Posco.

Before 2008, Nippon Steel had been among the world’s top three steel producers since 1970, when it was created by the merger of Yahata Iron & Steel Co. and Fuji Iron & Steel Co. Sumitomo Metal is Japan’s third-largest steel company.

The transaction was approved “faster than usual,” Masanori Fukamachi, senior officer for mergers and acquisitions at the FTC, said today at a briefing. “It serves no purpose to spent too much time on reviews and delay consolidation.”

The steelmakers agreed to take steps to ensure they aren’t restraining competition in products including high-pressure gas piping, the commission said.

Nippon Steel in February hired Mitsubishi UFJ Morgan Stanley Securities Co., Mizuho Securities Co., Bank of America Merrill Lynch and JPMorgan Chase & Co. Sumitomo retained Nikko Cordial Securities Inc., Goldman Sachs Group Inc., Deutsche Bank AG and Daiwa Securities Capital Markets Co. to advise on the merger.

The steelmakers started merger talks in December last year, Hiroshi Shimozuma, chairman of Sumitomo Metal said in February.

--With assistance from Yuriy Humber in Tokyo. Editors: Aaron Sheldrick, Rebecca Keenan

To contact the reporter on this story: Masumi Suga in Tokyo at msuga@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net


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