Nippon Steel, Sumitomo Metal Agree on $9.5 Billion Merger

Nippon Steel Corp. (5401) agreed to buy Sumitomo Metal Industries Ltd. (5405) for 726.5 billion yen ($9.5 billion) after seven months of talks, combining to become the world’s second-largest steelmaker.

For every one of Sumitomo’s shares, Nippon is offering 0.735 of its own, the companies said in a joint statement filed to the Tokyo Stock Exchange today. Including debt and equity, the deal is valued at 1.7 trillion yen, according to data compiled by Bloomberg.

The merger of Japan’s biggest and third-largest steelmakers is aimed at cutting costs by gaining leverage over raw material suppliers including BHP Billiton Ltd. (BHP) and increasing competition with rivals such as China’s Baosteel Group Corp. and Posco (005490) of South Korea. The combined company, to be known as Nippon Steel & Sumitomo Metal Corp., aims to save 150 billion yen annually after three years.

“The companies will continue to make further efforts to reduce costs, and establish cost competitiveness that will allow the integrated company to compete more effectively on a global basis,” the companies said. The deal will be completed by Oct.1, 2012, they said.

Nippon Steel declined 3.9 percent to close at 225 yen in the local exchange. The shares have declined 23 percent this year. Sumitomo Metal fell 2.4 percent to 165 yen. It will be de- listed by Sept. 26 next year.

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.

Emerging Markets

The new company will produce as much as 70 million metric tons of alloy annually within ten years as it increases its presence in the 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.

Steelmakers in Japan, Asia’s second biggest economy, need to seek more export growth as their domestic market shrinks in line with the nation’s aging population. Nippon and Sumitomo, both based in Tokyo, hold 44 percent share of the domestic market, while they rank their global stake at about 3 percent, based on crude steel output.

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

To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net Yasumasa Song in Tokyo at ysong9@bloomberg.net

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

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