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BRUSSELS/LONDON (Reuters) - ArcelorMittal ISPA.AS has pulled out of its joint $5 billion bid with Peabody Energy (BTU.N) for Australia's Macarthur Coal MCC.AX, days after the target's top shareholder accepted the offer and left the steelmaker with a higher-than-expected cost.
In a statement sent to the Australian stock market, the two sides said the world's largest steelmaker had "elected to sell its interest" in the bid vehicle, PEAMCoal, and would exit the joint venture, leaving Peabody to proceed alone with the takeover of the coal producer it has long coveted.
Peabody said the move was "good news," as completing the acquisition single-handed would help it reap the benefits sooner, but its shares fell over 7 percent in early trade, as surprised analysts and investors fretted over the strain on its finances and the potential need for a dilutive share issue.
Peabody, however, told investors there were no plans to issue equity any time soon and brushed off worries over the financing of a solo bid. Its leverage ratio is set to remain within its targeted 40 to 60 percent range even after taking full control, the largest U.S. coal producer said.
"We are prepared to finance this acquisition solely through cash and debt, and at debt levels that are very manageable," Peabody's Chief Financial Officer Michael Crews told analysts on a conference call.
The debt ratio would rise from a current 32 percent to "mid 50" percent if it takes 100 percent of Macarthur shares -- remaining within target, he said.
Peabody stock recovered some ground and closed down 3.1 percent at $39.66. ArcelorMittal shares, down more than 40 percent from the time of the bid in July, closed almost 2 percent weaker, underperforming basic resources peers .SXPP battered by worries over Europe.
Peabody and ArcelorMittal, which bid A$16 per share for the coal miner, had said on Monday they already had a relevant interest in about 59.85 percent of the shares. The terms of the bid foresee an increase of the bid price to A$16.25 if more than 90 percent of Macarthur's shares are tendered -- a possibility after China's Citic backed the bid on Friday. Citic and subsidiary Citic Resources Holdings (1205.HK) held a combined 25.2 percent in Macarthur.
Top shareholder Citic had been a major stumbling block in 2010, when Peabody made a thwarted, solo move on Macarthur.
ArcelorMittal already held 16 percent in Macarthur before the joint bid and would have faced only moderate spend without Citic's acceptance. With Citic backing the bid, it faced a cash outflow of some $1.2 billion.
Arcelor said on Tuesday that in the face of the high take-up, it preferred to invest elsewhere.
"ArcelorMittal considers that the capital commitment that would be required to retain its Macarthur interest and grow it materially further exceeds what is appropriate to allocate to a business that ArcelorMittal does not fully control and consolidate," the group said in a statement.
Shares in Macarthur's peers have dropped heavily in recent months, along with the battered equity markets, with most of its rivals losing as much as 40 to 50 percent of their market value -- making the Macarthur premium even harder to justify.
"I am very surprised. I think Peabody would still do a cash and stock deal. But it does strain their balance sheet a bit," said Meredith Bandy, analyst at BMO Capital Markets.
"It seems to be indicating that they are overpaying for MacArthur."
Some analysts welcomed ArcelorMittal's restraint, but others fretted over what it could mean for expectations of demand, as Arcelor has pursued a policy of pushing into mining to get direct access to the materials it needs to make steel.
"Given the recent steel price sell-off and deterioration in macro environment, this may perhaps be a sign that they are deeply concerned about the cycle," Credit Suisse said.
Peabody's acquisition of Macarthur will give it control of the world's top producer of pulverized coal as demand for steel-making materials holds up in Australia's key coal market, China.
"ArcelorMittal's decision accelerates our ability to realize synergies, integrate the operations and benefit from results," Peabody Chief Executive Gregory Boyce said.
Boyce welcomed the news but denied any rift with Arcelor -- seen initially as an explanation for the surprise departure.
Macarthur named Eric Ford, Peabody Energy's Chief Operating Officer, as its new chairman on Wednesday, while Julian Thornton was named Chief Executive. Thornton was previously head of Peabody Energy Australia.
The Macarthur deal is the latest in a string of acquisitions in Australian coal, as firms snap up mines positioned to feed off demand from Asian steel mills, while M&A interest in coal globally is increasing as share prices and valuations weaken.
Peabody has long been circling Macarthur but its previous efforts have failed, with a bid last year collapsing after Peabody cut its offer, blaming a new government mine tax.
The last remaining major shareholder in Macarthur yet to accept the Peabody offer is South Korean steelmaker POSCO (005490.KS), which owns a 7.25 percent stake.
Chung Jae-woong, POSCO spokesman in Seoul, said the company has not considered selling its stake in Macarthur.
Peabody said in Tuesday's statement that it would now own 100 percent in PEAMCoal, as a result of Arcelor's exit, and become owner of all the Macarthur shares that are tendered.
Under the terms of its deal with Peabody, ArcelorMittal must continue funding PEAMCoal for a further 90 days.
Additional reporting by Krishna Das in NEW YORK, Sonali Paul in PERTH, Miranda Maxwell in MELBOURNE and Hyunjoo Jin in SEOUL; Editing by David Cowell, Jon Loades-Carter and Vinu Pilakkott