OREANDA-NEWS. Novolipetsk Steel (LSE: NLMK) (“NLMK”) and Duferco Group  (“Duferco”) have reached a definitive agreement to create a joint venture company to acquire certain steel production and distribution facilities currently owned by Duferco in Europe and USA. 

According to the press service of NLMK, the principal terms of the transaction are:

• NLMK and Duferco will form a joint venture through Steel Invest & Finance S.A. (Luxembourg), a limited liability company (sociйtй anonyme) established under the laws of Luxembourg in which they both will hold a 50% interest.  NLMK will acquire its 50% interest for approximately USD 805 million, subject to a purchase price adjustment based on the results of the audited financial statements of the joint venture group for the fiscal year ended 30 September, 2006.  NLMK will finance the transaction out of existing cash funds.

• The joint venture will hold 100% or (in cases where there is an existing minority party) majority interests in 22 companies currently owned by Duferco. This includes one steel making plant and five steel rolling facilities with total finished steel output of 4.5 million tonnes in 2006 as well as a network of steel service centres.

• The joint venture companies will be managed by Duferco, subject to a shareholders agreement between the parties. Duferco management will remain responsible for operational, financial and technical issues as well as relations with employees, trade unions and local communities.

• The parties have agreed to embark on an ambitious technical upgrade and expansion programme for the joint venture companies providing for total investments of approximately EUR 375 million. The programme which will be overseen by Duferco management will draw on the financial support and expertise of NLMK and is intended to boost production while increasing supply of semi-finished steel products from NLMK.

• The transaction agreements provide for put option arrangements for each party in the event of future major corporate events, including future disagreements.

• The parties received clearance for the transaction from the European Commission on 20 November, 2006. The Hart-Scott-Rodino1 waiting period expired on 6 November, 2006 completing the process of obtaining US antitrust clearances for the transaction.

The strategies of NLMK and Duferco are complimentary. According to the recently announced Sustainable Growth Strategy 2007-2011, NLMK aims to expand its upstream platform, to increase production of low cost, high quality slabs and to convert them into value-added finished steel products in its core markets by acquiring re-rolling facilities. The increase in slab production by NLMK is envisaged at 3.4 million tonnes while Duferco plans to increase the production of high value-added and specialty steel grades. However, Duferco lacks semi-finished steel products capacity and has excess rolling capacity. This makes both companies natural partners in this joint venture.

The growing supply of high quality slabs from NLMK to the joint venture rolling facilities is expected to create substantial synergies. With the planned volume of slab supply increasing from 0.5 million tonnes in 2006 to 3.6 million tonnes by 2012, the total cumulative synergy effect including industrial, commercial, and R&D synergies is estimated at around USD 330 million. The creation of this joint venture perfectly fits the strategies of both NLMK and Duferco and provides for substantial industrial benefits, increased sustainability of earnings, stronger market positions and technological advancements.

The parties expect to complete the transaction by the end of this year.