ArcelorMittal (MT, MT.AE), the world's largest steelmaker, said Tuesday in a surprise announcement that it has decided to back out of its joint purchase of Australia's coal mining company 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," ArcelorMittal 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 making ArcelorMittal responsible for a larger cash payment than it was willing to spend for a minority stake in the coal mining company, a person familiar with the matter said.

Credit Suisse said in a note that ArcelorMittal may have initially entered the deal because it saw a good opportunity to increase its say in Macarthur by spending as little as US$200 million. The company, however, lost interest when the potential cash outlay grew to as much as US$1.2 billion following Citic's decision to accept the A$16-a-share offer, which valued Macarthur's equity at A$4.8 billion (US$5 billion).

Chinese state-owned investment company Citic Group is the largest shareholder in Macarthur with a 25.2% stake.

In July, ArcelorMittal and the world's largest private-sector coal company, U.S.-based Peabody Energy Corp. (BTU), launched 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 and ended up with a near-60% stake in the company as of Monday following Citic's decision to accept the offer

ArcelorMittal, which owned 16.1% of Macarthur prior to the bid and holds a 40% stake in the joint venture, said it is 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 with Peabody.

It said PEAMCoal's plan to increase its offer to A$16.25 a share, or A$4.9 billion, would stay in place if the joint venture 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.

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

ArcelorMittal will remain a shareholder in PEAMCoal until the termination arrangements have been concluded in about 90 days' time. It will also continue to fund the deal in accordance to the terms of the joint venture.

Meanwhile, Peabody said it will fully fund the entire acquisition with cash and debt and expects the deal to be earnings accretive within a year.

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

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