ArcelorMittal South Africa Ltd (ACL.JO) Tuesday said it has entered into an agreement to sell a 26% stake in its operations valued at over ZAR9 billion ($1.25 billion) to a consortium and employees in order to fulfill its black economic empowerment obligations.

South Africa's largest steel maker has put all of its assets into a new wholly owned subsidiary and plans to sell a 21% stake to the Ayigobi consortium and a 5% stake to an employee share ownership program in order to fulfill its obligations under South Africa's black economic empowerment, or BEE, legislation.

South Africa introduced black empowerment legislation after apartheid ended as a way to redistribute assets and wealth among the country's majority black population. Mining companies are required to sell a 26% equity stake in their assets to a partner with black empowerment credentials by 2014 in order to satisfy part of the government's BEE legislation.

The deal is subject to regulatory and shareholder approval. The steel maker, which is majority owned by steel titan ArcelorMittal (MT), expects shareholders to vote on the deal Sept. 28.

The deal will be fully funded by ArcelorMittal South Africa through a notional funding formula that includes an upfront loan and a maximum and minimum amount of profit that the new shareholders can make on the deal. The loan will be repaid by lowering the amount of dividend paid to the new shareholders.

The Ayigobi consortium will be locked in the deal for 14 years and have been guaranteed a minimum return of ZAR901 million and a maximum of ZAR2.07 billion over the investment period. The employees will be locked in the deal for five years and also have an adjusted minimum and maximum rate of return.

Nonkululeko Nyembezi-Heita, ArcelorMittal South Africa's chief executive said the deal has been in the making since 2008 and puts the company in good stead to renew its operating licences in the future and pursue growth.

"From day one we are presenting a sustainable and durable [BBE] transaction."

Separately, ArcelorMittal South Africa said Tuesday it has agreed to acquire Imperial Crown Trading, the company which holds prospecting rights to a 21.4% share of the Sishen iron ore mine, for ZAR800 million ($111 million). ArcelorMittal South Africa previously owned those rights but forgot to convert them into rights that conform with new legislation, thereby creating a window of opportunity for ICT to lay claim and win prospecting rights over that portion of the Sishen mine.

ArcelorMittal plans to buy ICT through its new subsidiary, subject to due diligence and ICT's ability to convert its prospecting rights to mining rights. ICT owners will be given a stake in the new subsidiary but Nyembezi-Heita said the two deals weren't linked since ICT's owners would still be allowed to participate in the BEE deal irrespective of whether ArcelorMittal purchases ICT.

The Ayigobi consortium is led by Sandile Zungu, the head of an investor group with previous experience in mining investments. The consortium is 75% comprised of strategic BEE partners including ICT's owners and 25% comprised of broad-based groups that have yet to be chosen. Those groups will include women-led groups, youth and other disadvantaged groups that would qualify for BEE status.

Under the employee share ownership plan, ArcelorMittal will issue shares in the new subsidiary to more than 8,500 employees but make sure that the program is 60% represented by previously disadvantaged individuals.

-By Alex MacDonald, Dow Jones Newswires; 44 20 7842 9328; alex.macdonald@dowjones.com
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