Steeling up for global dominance

The danger is that economic nationalism might well derail Mittal Steels' takeover bid

N Chandra Mohan Delhi

After launching a hostile $22.3 billion bid for Europe's steel giant Arcelor on January 27, 2006, world's largest steel maker Lakshmi Nivas Mittal is confident that he will pull it off. Visiting India ahead of the visit of France's President Jacques Chirac, in February, this Non-Resident Indian (NRI) businessman told media that he "feels positive about clinching the deal. We have done our job; let's see what happens now. I'm hopeful things will turn in our favour." Mittal hopes to clinch the deal by the second quarter of this year.

On the face of it, matters indeed are running according to Mittal's script. Regulators in Luxembourg, where Arcelor is headquartered, are reviewing the full draft prospectus of his bid. Despite the huge outcry in France and Luxembourg against his attempt to take over Europe's steel giant, this businessman has secured the financial backing of Societe Generale to finance his bid. This French bank now joins Citigroup and Goldman Sachs in providing a $9.6 billion line of credit for financing the acquisition of Arcelor.  

The bad news is that Arcelor has so far spurned Mittal's advances with hostility bordering on racism. This European steel maker has also launched a standard defence against the NRI businessman's unsolicited bid by raising its payout to its shareholders following a 37 per cent rise in its operating income during 2005. In sharp contrast, Mittal Steel posted a 23 per cent fall in its operating income in 2005. The Duchy of Luxembourg, which has a 5.6 per cent stake in Arcelor, is also contemplating legal options to thwart the takeover.

Despite all these manoeuvres, however, there are signs that Arcelor's resolve is steadily weakening. From an outright rejection of Mittal's bid, there are now statements from the company's top brass that he has "strongly undervalued" the European company and that the bid must be sweetened to make it an all-cash deal. The NRI steel magnate earlier sought to pre-empt Arcelor's higher payout by reserving the right to scale down his offer if the dividend was above a threshold and has so far resisted upping his bid.

Why is Mittal after Arcelor? For starters, the global steel industry, with an output of just over a billion tonnes of crude steel in 2005, remains highly fragmented, unlike the position in other industries where market share is more concentrated among the biggies. Mittal Steel’s output is the highest at 63 million tonnes, but this works out only to 6 per cent of world output. Even if he acquires Arcelor, the combined entity's output of 115 million tonnes will still be only 10 per cent of world’s steel production.
Not surprisingly, this NRI businessman is a serious advocate for greater consolidation, which will enable the steel industry to weather the ups and downs in its fortunes. The steel biggies are worried about the cooling off of the Chinese boom ahead of the Beijing Olympiad.  The dragon produced 349.4 million tonnes of steel in 2005 and has changed from being a voracious importer to an exporter. Steel prices will not be bullish but Mittal expects them to stabilise in the first half and strengthen in the second half of this year.

Three years ago, Mittal outlined his vision of a more consolidated industry with three combines each producing 100 million tonnes of steel. There are no prizes for guessing which one of them will be if his hostile bid for Arcelor goes through. But the fact that Arcelor is fiercely resisting the takeover through legal defences also indicates that it perhaps has ambitions of its own to become a 100 million tonnes giant in five years time and has made overtures to certain Chinese steel companies in this regard.

Whether or not Mittal is successful in his bid for global dominance, there is a clear and present danger that forces of economic nationalism might derail his Arcelor bid. While France and Luxembourg have led the Euro charge against the "Indian predator", India's well-intentioned response is not helpful to Mittal's cause either: Kamal Nath, Commerce Minister, has written to Peter Mandelson, European Union's (EU) trade commissioner that opposition to Mittal's bid violates World Trade Organisation (WTO) norms. 

According to Kamal Nath, national treatment was not being extended to Mittal's cross-border merger drive, a cardinal principle of WTO. EU had also made a request to India that this sort of treatment should be provided on a reciprocal basis, which did not seem to be happening in "letter and spirit". Although "full of wise men", the Indian government has also threatened the Grand Duchy with not ratifying
the bilateral double taxation agreement, stated Jean-Claude Juncker, Luxembourg's Prime Minister.

For all this sound and fury, the fact is that, because Mittal Steel is registered in Rotterdam, the fight is not between India and Europe but one between two European companies. Mittal Steel thus is a Dutch company and smells as much as does Arcelor of European perfume rather than Indian curry! True, the NRI still has an Indian passport but the fact is that he left Indian shores long ago and embarked on an acquisitive expansion route to his current numero uno position, building on what he inherited from his father, Mohan Lal Mittal. 

Take a look at his recent acquisitions. Before the Arcelor bid, Mittal acquired 93 per cent of Ukranian-based company Kriviy Rih for $4.8 billion in October 2005. Earlier that year, he entered the Chinese market for the first time after picking up a stake in a company Hunan Valin for $0.3 billion. October 25, 2004 was a red-letter day for Mittal as he vaulted to a global leadership position after taking over US' largest integrated steel producer. A year before, he went for Petrotub of Romania, among many others.

What he inherited in the mid-1990s was a steel plant making wire rods in Indonesia and a steel plant in Trinidad and Tobago, which his father acquired in 1989. Thereafter it was Mexico in the early 1990s. Mittal then turned his attention to Europe in 1995. The rest, as they say, is history as he acquired ailing plants in countries as diverse as Romania, Algeria, South Africa, Czech Republic and Poland during a severe downturn in the steel industry.  His empire now is spread across over 16 countries with 220,000 employees.

For these reasons, Mittal versus Arcelor is not an Indian versus European story; a fact that is registering also with European leaders like Chirac. In the run-up to his India visit, the French president told the press that the "Arcelor controversy has nothing to do with France and India"; that it really was a fight between a Luxembourg and a Dutch company. While the initial outbursts on the hostile takeover clearly were way over the top, a more cordial businesslike tone is now creeping into the discourse on this matter.

India must, therefore, not protest too loudly and upset the delicate stage the Mittal-Arcelor takeover attempt is currently in. From its point of view, the good news is that a globalising India Inc is not doing too badly in shopping for European companies without triggering controversy a la Mittal. India's pharma giant Dr Reddy's Laboratories recently made one of the largest overseas acquisitions of a German drug maker Betapharm. Videocon earlier took over the picture tubes business of France's Thomson SA.

Equally successful with Euro acquisitions are leading companies like Ranbaxy, Reliance Industries and auto parts maker Bharat Forge. None of them experienced problems to warrant Kamal Nath's concerns over EU's violation of WTO norms of national treatment. From EU's standpoint as well, there is also no warrant to feel concerned over India's reciprocal obligations as France's cement giant Lafarge has made acquisitions in India while the Swiss company Holcim took a controlling stake in Gujarat Ambuja.

The Mittal-Arcelor controversy must, therefore, be allowed to proceed to its logical conclusion rather than risk being derailed by economic nationalism. Mittal can take care of himself and does not need India's help beyond a point as he has set in motion forces that will trigger greater consolidation in the form of two or three 100 million tonne-combines in a highly fragmented global steel industry. This
all-important fact needs to be borne in mind rather than viewing the takeover
in India versus Europe terms or as a symbol of globalisation against a symbol
of Europeanisation.

 

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