Due diligence 'scuppered' Arcelor deal

An internal due diligence process may be at the heart of the failed empowerment deal between steel giant ArcelorMittal and the Ayigobi Consortium, which includes politically connected individuals and key shareholders in Imperial Crown Trading (ICT).

Early this week ArcelorMittal announced that the parties could not agree on an extension of the deal and, as such, the R9-billion transaction had lapsed.

Two sources with knowledge of the circumstances pointed to the due diligence as a cause for the lapsed deal.

But the decision by ArcelorMittal to enter high-court battles, essentially on Kumba’s side, is unlikely to have instilled a sense of co-operation from ArcelorMittal’s potential partners.
The Mail & Guardian reported in May how ArcelorMittal applied to join Kumba’s Sishen Iron Ore Company (SIOC) as a co-applicant in the review of the rights award to ICT. Kumba, as part of the court proceedings, applied for a declarator, to the effect that it is the only entity entitled to apply for and be granted the residual 21% mining rights.

In its joinder application, ArcelorMittal came out against ICT, and argued that ICT could not be awarded the rights as the SIOC owned 100% of them under the new Mineral and Petroleum Resources Development Act.

The judge is expected to pronounce on the matter at the earliest in October and then it may be subject to an appeal, depending on the outcome. Because of this, the case might not be resolved for months, if not years.

Questions in the due diligence went to the heart of ICT’s defence in court and ICT wanted the matters tested in court before completing the due diligence, said one source. The decision by ArcelorMittal to “join forces” with Kumba and risk the transaction was the “straw that broke the camel’s back”.

But Themba Hlengani, spokesperson for ArcelorMittal, said the company would not comment on the due diligence—it was confidential.

But the purchase of ICT and the empowerment deal with the Ayigobi Consortium were “mutually exclusive”. “The recent announcement pertains to the fact that the agreement has lapsed due to the non-fulfilment of conditions precedent in respect of the originally proposed structure,” he said.

“In terms of the ICT transaction, we will only proceed with the proposed transaction if ICT does in fact acquire the disputed 21.4% mining right, and if all conditions precedent are fulfilled by the parties.

“Shareholders will be kept fully informed on both the ICT transaction and the continued BEE [black economic empowerment] process,” Hlengani said.

Empowerment deal
The steelmaker is still committed to an empowerment deal but it is not known what form this will take or whether it will still include Ayigobi led by Sandile Zungu.

“It is too early to speculate on this,” said Hlengani. “Amsa [ArcelorMittal South Africa] remains firm in its intention to conclude an appropriate BEE transaction.”

Elements such as the employee share ownership programme could remain a part of any future structure.

Zungu said that Ayigobi had a great deal of understanding for the decision and, as the company had been trading under a cautionary for some time, it was “inevitable that the transaction would be closed successfully or aborted”.

It was important that shareholders could trade normally again and, as such, it understood the withdrawal of the cautionary, he said.

ICT did not respond to requests for comment.

While the court battle continues, ArcelorMittal and Kumba are expected to begin arbitration early next year about the cost plus 3% pricing agreement. The companies are currently working under an interim pricing agreement—ArcelorMittal pays $50 a tonne for iron ore supplied to its Saldanha plant and $70 a tonne for ore delivered to its inland plants.

The rights kerfuffle and the impact of the dispute on the local steel sector infuriated the state. In November last year, the Cabinet appointed an interdepartmental task team to investigate the iron ore and steel sector. Part of its mandate was to create a government determined developmental pricing model.

The department of trade and industry declined to comment on the failed BEE transaction. “The iron ore and steel task team is going to provide a report-back to Cabinet in October on progress,” said spokesperson Sidwell Medupe. “It would be premature to comment at this stage.”

At the time of the interim pricing agreement’s determination, the price of ore at cost plus 3% was about $30 a tonne.

While the pricing spat has been bad for the downstream steel-manufacturing sector, the results have been good for Kumba. Its staff stand to benefit from a windfall of more than R400 000 a worker through its share ownership scheme, it announced early this week.

A deal steeped in controversy
The controversial empowerment deal was announced 13 months ago, alongside ArcelorMittal’s purchase of ICT for R800-million, and would include key ICT shareholders, as well as influential figures such as the Gupta family and President Jacob Zuma’s son, Duduzane Zuma, in the Ayigobi empowerment consortium lead by businessman Sandile Zungu.

However, key to the transaction’s completion and the acquisition of ICT—as ArcelorMittal’s chief executive Nku Nyembezi-Heita told the M&G last August—was a due diligence to meet the requirements of the United States Foreign Corrupt Practices Act and to satisfy South African anti-corruption legislation.

For the purchase to go through, ICT had to win the mining rights to a portion of Kumba Iron Ore’s Sishen mine. Controversially, ICT had been awarded a prospecting right (the precursor to a mining right) over a 21% “undivided share” of the rights to Sishen, after ArcelorMittal failed to convert this stake into a new order mining right under the Mineral and Petroleum Rights Development Act.

Instead, the Sishen Iron Ore Company, Kumba’s wholly owned subsidiary, applied for the lapsed right and is currently challenging ICT and the department of minerals in the high court.

The stake in the mine is also at the heart of a bitter dispute over the supply of iron ore to ArcelorMittal by Kumba, at cost plus 3%, stemming from the unbundling of state-owned Iscor into what is now ArcelorMittal and Kumba.

The due diligence is understood to be in limbo while ICT defends itself in court over whether it was allegedly awarded the rights fraudulently, with the co-operation of allegedly corrupt departmental officials.

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