Cleveland-Cliffs/Alpha Natural Resources Became A Takeover Target Once Deal Was Announced

Implications: Contrary to the hedge fund, Harbinger's, belief that Cleveland-Cliffs takeover bid of Alpha was to put Cleveland-Cliffs itself out of reach of potential acquirers, my first thought on this deal was: which steel company is now going to buy this newly formed company?  These are two companies that sell commodities which are in short supply longterm and their value jointly may be much more valuable to a steel company than individually.  Hence, this would create greater value to shareholders of both Cliffs and Alpha.

Analysis: As soon as I heard about this deal, my first thought was: which steel maker will now move to take over this newly formed company?Therefore, Harbinger would have more to gain by approving the Cliffs/Alpha deal than by selling Cliffs separately to a steel company like Severstahl, Arcelor/Mittal or US Steel.  By bringing these two companies together, one is gaining stakes in two important commodities in the supply chain to make steel - met coal and iron ore.  Both of these commodities are in short supply longterm and one could argue that it may even help a steel maker control these costs of his raw materials.  Besides controlling the costs, imagine the benefit of gaining profits from not only the steel you create as well as the raw materials you are purchasing?  It's like building a house and making a profit on the construction of the house as well as the sale of the finished home.  Maybe this is a bad example in this subprime malaise, but I think one can see what I'm driving at. 

Harbinger does raise a valid concern about commodity prices having reached their peak.  Didn't we see this before in the 70's to early 80's with oil and coal? Nevertheless, this seems to be a very short term view, and many in the market believe met coal prices will climb even higher next year and current international spot prices of iron ore are well above the longterm contract prices also.  I'm not buying into the plus $400/MT met coal contract prices and iron ore contract prices rising by another 75 % next year YET, but all it takes is some more supply disruptions and the aforementioned scenario could turn into a reality very quickly.

In the longterm, there is an ongoing shortage of high quality coals and iron ores to make steel.  The longterm demand in emerging markets also does not seem to be waning either.  Unless there is a worldwide economic meltdown and we see negative growth in place like China and India, it would seem to me that one would be possibly giving away Cliffs at an extreme discount to the market at a 30 % premium to today's stock price.  About a month ago, CLF traded at its 52-week high of $121.95 per share.  To gain only $8 per share above this $121.95 share price for the sale of its assets would seem like a steal to me again.  

Markus Bates