Arcelor's 3% convertibles look slightly lower with dividend increase, analysts say

By Rebecca Melvin

Princeton, N.J., Feb. 16 - Arcelor SA's announced dividend increase will have a "marginally negative impact" on the valuation of the European steelmaker's 3% convertible bonds due 2017, according to Barclays Capital convertibles analysts.

Luxembourg-based Arcelor posted strong fourth-quarter and full-year results and raised its dividend to a proposed €1.20 per share, which is up 85% from a year ago, the analysts said in a research note.

The company stated that the dividend is not an exceptional or special dividend.

"Taking the €1.20 per share as a base dividend going forward, we obtain a theoretical value for the bond of €29.75 against Wednesday's closing share price of €29.79. The bond's last price was €29.99, reflecting an implied dividend of about €1.0 per share," Barclays' analysts Luke Olsen, Haidje Rustau and Heather Beattie said.

The analysts added that if rival Mittal Steel proceeds with its takeover of Arcelor prior to the ex-dividend date (the company has proposed May 28 as a pay out date), then "we estimate that Arcelor's convertible should be valued at €30.74 versus €29.79, given the terms of Mittal Steel's offer for Arcelor's convertible bond and stock, respectively."

The Barclays Capital valuation assumes no special or extraordinary dividends to shareholders in the near future; therefore, the convertible should trade above €29.75, the analysts said.

They also noted that the bond could gain on a delta-neutral basis if Arcelor's share price falls in the event of an unsuccessful Mittal Steel offer.

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