This holiday season, consumers aren't the only ones overpaying for ill-advised purchases.
Luxembourg-based Arcelor, the world's largest steelmaker, announced last week that it intends to purchase Canadian rival Dofasco. Of course, I'm using the term "rival" pretty loosely here. With just $3.5 billion in annual sales, Dofasco isn't exactly in the same league with Arcelor. One of the only steelmakers in the world that can still stand toe-to-toe with Arcelor and its $39.4 billion in trailing-12-months sales is next-door Dutch neighbor Mittal Steel (NYSE:MT), with $27.2 billion in sales.
Speaking of Mittal, Arcelor is likely aiming squarely at them with this Dofasco deal. Depending on the metrics you use, either Arcelor or Mittal is currently the world's "largest steel company." According to data from Capital IQ, Arcelor beats Mittal on sales; Mittal has the edge on profits ($4.3 billion vs. Arcelor's $4 billion).
Analysts suggest that Arcelor's aim in acquiring Dofasco is to get a larger piece of the U.S. auto manufacturing market, because steel sales to the automakers traditionally bring greater margins than, say, sales of I-beams to skyscraper-builders. Arcelor could be hoping that by grabbing Dofasco and its customer base, it will be able to close the profit gap with Mittal.
Almost simultaneously with Arcelor's announcement of the Dofasco deal, we saw GM (NYSE:GM) announce that it's ramping up its layoffs program and closing several factories. This shouldn't have surprised Arcelor after the Delphi bankruptcy. Yet the steel company still seems determined to make this ill-advised acquisition in hopes of grabbing -- what? A bigger share of a shrinking market?
That makes no sense. And it gets worse when you look at the deal's price tag. Arcelor wants to pay $3.7 billion for a company that had $3.5 billion in sales back when GM was still building lots of cars to sell at fire-sale prices. That's roughly 1.1 times sales today, and likely to look pricier in the future, if Dofasco's sales decline in tandem with Detroit's. Meanwhile, Arcelor itself carries a market value of just 0.4x sales.
A better move, in this Fool's view, would have been for Arcelor to pursue Motley Fool Income Investor pick Posco (NYSE:PKX). It sells for just 0.6 times sales, and is positioned right next door to both the booming Chinese economy and the red-hot Japanese automakers that are eating Detroit's lunch.
For more on the Arcelor/Mittal rivalry, read:
Fool contributor Rich Smith has no position in any of the companies mentioned in this article.
