More Drama at the Cleveland Cliffs (CLF) Corral

What an interesting saga - more details are emerging this morning per the Wall Street Journal on what exactly Harbinger Capital is thinking and why they are opposing the merger between Alpha Natural Resources (ANR) and Cleveland Cliffs (CLF) [Jul 17: High Drama at the Cleveland Cliffs Corral]

• Cleveland-Cliffs Inc. forgot to get just one thing before unveiling its $10 billion deal for Alpha Natural Resources Inc. -- Phil Falcone's permission. As a result, the Cleveland iron-ore producer may have inadvertently put itself into play.
• Within two days of the deal's July 16 announcement, Harbinger Capital, Mr. Falcone's hedge fund and Cleveland-Cliffs' largest shareholder, said it opposed the move, leaving the transaction in doubt. With a 16% stake in Cliffs, Mr. Falcone effectively has enough power to block any transaction.
• Behind the scenes, the Harbinger chief has begun pushing for Cleveland-Cliffs to take advantage of the global steel boom and put itself up for sale. Mr. Falcone reckons Cleveland-Cliffs could fetch as much as $130 a share, or about $14 billion, according to a person close to Harbinger. Harbinger hired Moelis & Co., a mergers-and-acquisitions boutique, as its adviser.
• Cleveland-Cliffs could be an attractive target for a number of steelmakers, analysts say. Russia's OAO Severstal, which has been expanding in the U.S., is seen by some in the industry as the most likely suitor, provided it could raise enough cash for a deal.
• Luxembourg-based ArcelorMittal, the world's largest steelmaker by revenue, also has been mentioned, though some analysts say Arcelor's long-term supply guarantees from Cleveland-Cliffs make a purchase unnecessary. Domestic steelmakers, including Nucor Corp. and U.S. Steel Corp., also would have the financial resources to pursue the company.
• But any takeover offer could run into resistance from another key camp—Cleveland-Cliffs management. "We believe our growth strategy exceeds any value we would get for the shareholders," Cleveland-Cliffs Chief Executive Joseph A. Carrabba said in an interview Thursday. He declined to comment on whether the company had already been approached.
• Without Harbinger's support there won't be a deal with Alpha, either. In order to win approval under Ohio law, Cleveland-Cliffs would need two-thirds of the shareholder vote. Though a victory might be mathematically possible without Harbinger's support, it is unlikely.
• Mr. Falcone has a different take on the markets, says a person familiar with his views. He believes commodity prices are nearing their peak, and that this is the best time for Cleveland-Cliffs to fetch a premium valuation. He would prefer that Cleveland-Cliffs focus on cutting costs instead of integrating a big company.
• Cleveland-Cliffs informed Harbinger of a deal the night before the announcement, according to people in both camps. Mr. Carrabba said Cleveland-Cliffs had been sharing its views of consolidation in the mining sector with shareholders, including Harbinger, for the past two years. Harbinger increased its stake over that same period.
• "Most folks would have taken that as an endorsement of our strategy," Mr. Carrabba said.
• The hedge fund sees the Alpha deal as an attempt by Cleveland-Cliffs to put itself out of reach of potential acquirers.

Takeaways:

1. Fascinating!
2. In almost every blog entry re: Cleveland Cliffs I mentioned I saw it as a future buyout candidate for a steel firm; apparently Harbinger Capital had the same thought process but a lot more money to do something about it.
3. When this deal came through I was not surprised that Alpha was a target, but WHOM was doing the acquisition was a shock - it lent to the belief that Cleveland Cliffs wants to be an independent player as opposed to a company being acquired.
4. I still thought the combined duo could be acquired but due to the size it would limit the number of companies who could swallow a combined entity
5. Hedge funds, unlike me, don't have time to wait so they don't want a long drawn out process of these 2 companies combining, and then wait for another bid for the new company - they want their quick gains and then out. They get paid on the quarter. Nothing else matters aside for the current 90 day period.
   
6. The power of hedge funds in this market grows by the second, minute, hour, and day.
7. The fact that hedge funds have the power to overrule a management who wants to go in a different direction is a growing trend
   
8. We've reduced our exposure to both names due to the "commodities stink because hedge funds say so" trade, along with the uncertainty and overhang - but both names remain among our favorites.
9. Both names have fallen below their 50 day moving average within the past 2 sessions
   
10. Interesting to see the take by Harbinger that this is the "top" in commodities. While I could see that for a 12-18 month period, I obviously disagree over a 5-10 year time frame. But again, hedge funds care about 1 quarter out as that is what they are paid on, not 5-10 years.
11. Did I mention fascinating?

Long both names in fund; long Alpha Natural Resources in personal account