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.