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     Jun 27, 2006
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.

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)

Battle for Arcelor down to the wire (Jun 24, '06)

Severstal's tequila sunset (Jun 1, '06)

Moment of truth for Mittal (May 24, '06)

Mittal pushes on despite opposition (Apr 5, '06)

Grandmaster Mittal eyeing China (Feb 9, '06)

Mittal steeled for another foray on Arcelor (Feb 1, '06)

Indian tycoon world's largest steelmaker (Oct 28, '04)

The making of an Indian steel king (Mar 19, '04)


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