Arcelor Mittal: The dawn of a steel
giant By David M Lenard
HUA HIN, Thailand - In a historic
agreement that promised to reshape the global
steel industry fundamentally, Luxembourg-based
steel giant Arcelor SA agreed on Sunday to a
merger with Rotterdam-based Mittal Steel, headed
by Indian-born magnate Lakshmi Mittal, creating
the world's largest steelmaker, three times as big
as its nearest rival.
The merger, billed
as a "merger of equals" in the two companies'
joint June 26 press release, followed a marathon
nine-hour meeting the previous day, during which
Arcelor accepted Mittal's revised bid of 26.9
billion euros (US$33.7 billion), or 40.40 euros a
share. Mittal's original offer had been for 17.5
billion euros; on May 19, this was increased to 24
billion euros, and Mittal had
stressed he would not
increase the bid further. In the end, he did - the
final offer was almost double the original bid.
Analysts such as Gavin Wendt, with Sydney-based
Fat Prophets Ltd, described the offer as
"generous".
Neither was price the only
concession Mittal had to make. His firm's stake in
the merged company would be only 40%, far less
than the controlling stake he had originally
wanted, though this would still make Mittal by far
the largest single shareholder in the combine.
Significantly, too, the new firm will be named
Arcelor Mittal, not Mittal Arcelor. (Kazuo
Fujisawa of Japan's JFE Steel, writing in the
Financial Times, waggishly suggested "M&A
Steel" as a name for the newborn giant, reflecting
both the initials of its two component firms and
its manner of birth.)
Despite the steep
price, the merger was clearly an immense personal
triumph for Mittal. The steel tycoon, born in
Sadulpur in the Indian state of Rajasthan, rose
from humble beginnings to become one of the
world's wealthiest men, and must have regarded the
Arcelor bid as the capstone in a career of bold
expansionary moves. Apparently, one of Mittal's
first acts after the conclusion of the agreement
was to call US billionaire Wilbur Ross, who sold
his International Steel Group to Mittal last year.
Ross told Bloomberg: "[Mittal] just said, 'We got
it, we got it,' about 20 times."
The
Indian media treated Mittal as a national hero on
Monday, with the CNBC-TV18 television station
calling him "the Sultan of Steel", and The Times
of India displaying a picture of him wearing a
gladiator's helmet. Indeed, the intense opposition
by some Europeans to the Mittal bid was perceived
by many Indians to have racial overtones, to the
extent that the Indian government even complained
diplomatically to the European Union.
The
Arcelor Mittal press release on Monday also noted
that Mittal executive - and Lakshmi Mittal's son -
Aditya Mittal would sit on the management board of
the combined firm. This was also a victory for
Lakshmi Mittal, inasmuch as Arcelor chief
executive officer Guy Dolle had singled out
Aditya's inexperience as key justification for his
claim that Mittal Steel was not professionally
managed. At a January news conference, Dolle said
bitingly, "I'd like to present to you my fellow
managers [at Arcelor] - my son isn't one of them."
Dolle was conspicuously absent from the
roster of Arcelor executives commenting favorably
on the deal; deputy CEO Michael Wurth told
reporters Sunday night, "We are absolutely happy,"
but refused to comment regarding Dolle's role in
the new firm.
There is little doubt that
Dolle was the key figure in Arcelor's often
vitriolic efforts to fend off Mittal. This may
have originated in a personal meeting between
Mittal and Dolle in which Mittal first raised the
possibility of a bid; Dolle is said to have
reacted dismissively, then was horrified when
Mittal refused to be put off, instead going ahead
with a hostile takeover attempt.
"It is
too late to do a friendly deal," Dolle had said,
criticizing Mittal Steel's "mono-cultural
management" and likening its offer - which
included payment partly in Mittal shares - to
"Monopoly money". The French executive even
disparaged the quality of Mittal's products,
likening them to "eau de cologne" in contrast to
Arcelor's "perfume".
The Arcelor
management, under Dolle's leadership, then
proceeded to play virtually every takeover defense
card imaginable in its ultimately doomed effort to
keep Mittal at bay. Chief among these was the
alternative deal with so-called "white knight"
Severstal of Russia and its oligarch CEO Alexei
Mordashov. Though Arcelor and Severstal had talked
of a tie-up for years, and had even made legally
binding commitments to a partnership just days
ago, what apparently doomed that partnership, and
sealed the deal for Mittal, was deep hostility by
important Arcelor shareholders to the idea of
combining Arcelor with the Russian firm.
As Stephen Pope, head of equity research
at Cantor Fitzgerald LP in London, observed in a
Bloomberg interview, "Shareholders in Arcelor have
become very vocal [recently in opposition to the
Severstal deal] ... That is probably what lanced
the boil."
In spite of Mittal's victory,
it was clear that the new firm would have to pay
substantial penalties to Severstal (130 million or
140 million euros were commonly cited numbers,
depending on the source), and Severstal said that
it was considering legal action against Arcelor in
view of the fact that the companies had announced
an alliance only days earlier.
Another
defense was Arcelor's "poison pill" involving
Dofasco Group, an Ontario, Canada-based component
of Arcelor. Arcelor had transferred ownership of
Dofasco to a Netherlands-based trust solely in
order to prevent Mittal's planned sale of the firm
following any takeover. Significantly, the Dofasco
issue remained unresolved in the June 25 deal
between Arcelor and Mittal. Monday's press release
stated: "Arcelor and Mittal have not been able to
reach agreement as to the ultimate disposition of
the Dofasco Group. Discussion of this question
will continue following successful completion of
the tender offer."
Changing the steel
landscape in Asia The birth of Arcelor Mittal
affected the global steel industry, and financial
markets around the world, almost immediately, and
Asia was no exception. Stocks of most Asian
steelmakers rose sharply on Monday as investors
speculated that the new behemoth would create
pressure for more aggressive transnational
consolidation elsewhere in the world, in spite of
the fact that Arcelor Mittal has relatively little
presence in Asia at the moment. Exceptions include
an Arcelor alliance with world No 3 (now No 2)
Nippon Steel, and a Mittal plant in Kazakhstan;
Arcelor had also been pursuing tie-ups with
Chinese steelmakers.
Nippon Steel declined to
comment on the Arcelor merger on Monday, according
to Reuters; the company's contract with Arcelor
allows either side to sever the alliance in the
event of a takeover of either firm. In February,
Nippon Steel president Akio Mimura said his
company could prevent Arcelor from using various
technologies it has provided to Arcelor as part of
their alliance in the event of an Arcelor
takeover, but had not decided then whether and how
it would do so. On Monday, Nippon Steel shares
were up as much as 1.22%. JFE Holdings, Japan's
second-largest steel company and the world's
fifth-largest, was up 0.22%, and Sumitomo Metal
Industries gained as much as 1.33%.
In
South Korea, shares of the top steelmaker and the
world's fourth-largest, Posco, were up as much as
3.02% in Monday trading.
Yoji Takeda, vice
president of RBC Investment Management in Hong
Kong, speculated in an interview with MarketWatch
that "there's a possibility that Mittal will come
to Asia", adding: "The valuations of Asian steel
companies are not expensive at all, and
considering the growth opportunities, it could
happen." According to Takeda, likely takeover
targets would be large producers in Japan and
South Korea. However, he also felt that Mittal
would likely wait before making another large
acquisition in the wake of the Arcelor deal.
China has been considered by many as the
key question for the international steel industry
going forward, inasmuch as the country is now one
of the world's biggest producers and users,
accounting for a third of global output, and has
just in the past few years become one of its most
important exporters. The Chinese government has
adopted a policy of consolidation and phasing out
smaller, older steel mills; pressure on weaker
players has only increased in view of the recent
acceptance by Chinese steelmakers of a 19%
increase in iron-ore prices. Though it appeared
unlikely in the short term that Arcelor Mittal
would seek new acquisitions in China, there is a
clear possibility that the merger may pressure the
Chinese industry to further accelerate and deepen
the consolidation trend already under way.
In Monday trading, Hong Kong-listed Angang
New Steel gained as much as 2.15%; on the Shenzhen
exchange, Beijing Shougang was up 2.5%.
The Arcelor Mittal effect could also be
seen on the Indian bourse, with metals and
commodity stocks broadly higher. An increase in
the BSE index on Sunday was led by Tata Steel Ltd,
which ended nearly 4% higher at Rs532.40 ($11.50).
David M Lenard is a
correspondent for Asia Times Online in
Thailand.
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