Shares of miner and steelmaker Cleveland-Cliffs (NYSE:CLF) rose by around 10% in the first half-hour of trading on Monday. Shares of fellow steelmaker ArcelorMittal (NYSE:MT) rose nearly 10%, as well. Both had given back their early gains by 10 a.m. EDT, with each up in the 7% range, and like their stocks, their stories are joined at the hip.
Over the weekend, Cleveland-Cliffs worked out a deal to buy virtually all of ArcelorMittal's U.S. steelmaking business. At a cost of roughly $1.4 billion, it's a fairly sizable purchase for Cleveland-Cliffs, with its approximately $2.5 billion market cap. Although the acquisition won't include any debt from the U.S. operations of ArcelorMittal, Cleveland-Cliffs will assume pension and other liabilities, bringing the total value of the deal to about $3.3 billion.
Cleveland-Cliffs will pay for the transaction with a mix of cash ($505 million) and preferred stock ($373 million), with the rest in common stock. In total, Cleveland-Cliffs will acquire six steel mills, eight finishing facilities, two iron-ore mining and pelletizing operations, and three coal operations.
Investors obviously liked the deal for both Cleveland-Cliffs and ArcelorMittal, as each rose on the news. ArcelorMittal is raising cash so it can reduce leverage, which means it is living up to a previously stated goal.
Cleveland-Cliffs, meanwhile, is continuing its expansion into the steel sector, which it basically kicked off in earnest in early 2020 when it consummated the acquisition of struggling steelmaker AK Steel. Since scale is important in the steel space, it makes complete sense that Cleveland-Cliffs would want to add even more capacity. And since the company has long been one of the major North American iron ore producers, these acquisitions allow it to create a vertically integrated business. That, too, should be a net benefit. It's understandable that investors would be excited about the news.
Cleveland-Cliffs believes this purchase will be accretive to earnings from the get-go and that it will help the company to reduce its leverage. If both of those beliefs pan out, it will indeed be a well-played purchase.
That said, steel is a highly cyclical industry, and long-term investors might want to wait on the sidelines to see how the integration process goes. Synergies sometimes don't pan out as expected, and a deep industry downturn could leave the company dealing with additional headwinds that it hadn't anticipated.