An interesting story has developed around South Korean steelmaker POSCO (NYSE:PKX) this year, involving takeover concerns and a new partnership presumably aimed at expansion. I would say we've hit Act 3, but I wouldn't be surprised if there are more twists in store.
The company announced last week that it's looking to form a strategic partnership with Arcelor Mittal (NYSE:MT), the firm most often rumored as a suitor for POSCO, which began life as a state-owned firm but now floats freely as a public company. The company lacks a high level of insider ownership and finds itself vulnerable to a foreign takeover -- something company executives have strongly signaled that they would prefer to avoid.
To help gird itself against the designs of foreigners, the company has already swapped shares with some other Korean companies -- banks, shipbuilders, and steelmakers alike -- and has a strategic alliance with Nippon Steel, a Japanese firm that counts as POSCO's largest shareholder, at around 5% of shares outstanding.
All of this maneuvering to prevent a takeover would be pretty exasperating if POSCO were an underperforming company. But it's an efficient, low-cost producer. That raises an important question: Would shareholders really want this company to be bought out? POSCO's near-monopoly in its home market promises far greater long-term returns than a modest buyout premium would offer.
But even though it's rock-solid at home in South Korea, POSCO has faced some difficulties entering the Indian steel market. Angry villagers who oppose construction of a 4,000-acre facility in the eastern Indian state of Orissa briefly abducted three company employees in May. They were released after promising not to come back.
This event made me wonder whether POSCO may not be able to go it alone after all, if it's intent on expanding internationally. That would explain the partnership with Mittal. After all, Lakshmi Mittal built that company up to be the world's largest producer through countless acquisitions.
What happens next between these two leading producers is anyone's guess. Takeover or no takeover, though, POSCO looks like the one to own, based on balance-sheet strength and the multiple of enterprise value to cash flows.
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Fool contributor Toby Shute has thus far seen only the airports of Korea and Japan. He doesn't own shares in any company mentioned. There's nothing defensive about The Motley Fool's disclosure policy.
