2nd UPDATE: ArcelorMittal Surprises With U-Turn On Macarthur Deal

ArcelorMittal (MT), the world's largest steel maker, said Tuesday in a surprise announcement that it has decided to backout of its joint purchase of Australia's coal miner Macarthur Coal Ltd. (MCC.AU).

"ArcelorMittal has determined that it would no longer be appropriate to allocate substantial capital to the acquisition of a non-controlling, minority business interest," the company said in a statement.

"Given the unanticipated level of acceptances into the offer, ArcelorMittal believes that it is more appropriate to focus its capital elsewhere in its business," the company added.

ArcelorMittal backed out of the deal after some of Macarthur's large shareholders such as Citic Group tendered their shares into the offer, thereby increasing Arcelormittal's capital outlay requirement significantly while maintaining a minority interest in the company, a person familiar with the matter said.

Credit Suisse said in a note that the ArcelorMittal decision suggests that the steelmaker may have initially seen a good opportunity to increase its say in Macarthur through an incremental investment of $200 million, but lost interest when the cash outlay grew to as much as $1.2 billion following Citic's decision to accept the A$16 a share offer.

Chinese state-owned investment firm Citic Group is the largest shareholder in the company with a 25.2% stake and accepted the offer Friday.

ArcelorMittal and the world's largest private sector coal company, U.S-based Peabody Energy Corp. (BTU), launched in July a joint takeover of the world's biggest producer of pulverized coking coal, a low-cost raw material used to make steel, through their PEAMCoal Pty Ltd joint venture.

PEAMCoal sought to gain a 50.01% control of Macarthur shares by offering as much as A$16 a share and ended up with a near 60% stake as of Monday following Citic's decision to accept the offer.

ArcelorMittal, which owns 16.1% of Macarthur prior to the bid and owns a 40% stake in the joint venture, said it's now tendering all of its Macarthur shares to PEAMCoal, noting that the decision to sell out of the deal was in accordance with the rights originally embedded in an agreement negotiated with Peabody.

Credit Suisse said ArcelorMittal's decision was a "sensible move" while Peabody's CEO Greg Boyce said the decision was "good news for Peabody."

PEAMCoal plans to increase its offer to A$16.25 or $4.9 billion if it is able to secure 90% of Macarthur by Nov 11. That would allow the joint venture to move to compulsory acquisition of the remaining shares under Australian takeover law.

ArcelorMittal said it will remain a shareholder in PEAMCoal until the termination arrangements are completed in approximately 90 days' time and will continue to fund the deal in accordance to the terms of the joint venture agreement.

Peabody said Tuesday it will fully fund the deal with cash and debt, some of which is in the process of being lined up, and noted that the deal would be earnings accretive within a year.

ArcelorMittal's shares closed down 2% or at EUR14.14 a share while Peabody's shares trading down 1% at $40.56 a share.

-By Alex MacDonald and Matt Day, Dow Jones Newswires; 44 20 7842 9328; [e-mail]