Global Insight Perspective

Significance

Facing a potential revolt from its own minority shareholders, the board of directors of Luxembourg-based steel giant Arcelor have indicated that they are willing to accept a revised takeover offer from the Netherlands-based Mittal steel giant.

Implications

Irrespective of the business rationale behind the deal, the capitulation of the Arcelor board is a major victory for the rights of minority shareholders in addition to a defeat for the growing economic nationalism which has infected a number of European capitals in response to a wave of cross-border mergers and acquisitions.

Outlook

The establishment of the first 100 million tonne steel giant will act as a further spur to the ongoing consolidation in the steel industry with a host of cross border mergers and acquisitions expected to occur in the short term.

The End to an Acrimonious Deal

Over the past five months, the steel industry has become the scene of one of the corporate world's most antagonistic and hostile takeover battles in recent history, which at various points has involved a array of characters including a number of European governments, a Russian oligarch and Indian-born magnate and has highlighted the economic nationalist backlash across Europe to a host of attempted cross-border takeovers.

After a marathon nine-hour meeting yesterday (25 June), the board of the Luxembourg-based, pan-European steel group Arcelor recommended to shareholders that they should accept an improved offer from Mittal, the world's biggest steel company to merge the two companies, creating in the process a company whose combined output would top the symbolic 100 million metric tonnes (Mmt) mark, three times more than its nearest competitor. Whilst Arcelor's chief executive Guy Dollé has gone on record dismissing Mittal's earlier offer which combined cash and shares as "paying partly in monopoly money", it was left to Arcelor chairman Joespeh Kinsch to announce that the board had decided to undertake a remarkable U-turn and was prepared to accept Mittal's raised offer which roughly values Arcelor at 26.8 billion euro (US$33.6 billion), some 3.5 billion euro higher than Mittal's chairman Lakshmi Mittal's previous bid. Under the terms of the new offer, Arcelor's shares have been valued at 40.44 euro, nearly double what the company was trading in January.

Moreover, in a reconciliatory gesture, the new company will be called "Arcelor-Mittal" and will be based in Luxembourg, while Arcelor's shareholders would retain some 50.6% in the new company. At the same time the board will include six members from each entity while Kinsch will remain as the combined company's chairman with Lakshmi Mittal becoming the president of the board.

Any takeover battle between the two market leaders would expose the inherent tensions within the rival companies, but the bitter struggle between Arcelor and Mittal has not only been a battle of who will be at the forefront of the consolidating steel industry, but has also exposed the economic protectionism within a number of European capitals and the growth in economic nationalism in the face of liberal market competition. Arising from the merger of Spain's Arceralia, France's Usinor and Luxembourg-based Arbed in 2001, Arcelor possesses close ties to political establishment in the respective countries and Dollé and Arcelor received strong backing from politicians in France and Luxembourg in his campaign against Mittal, despite the fact that Dollé's position smacked of hypocrisy and double standards.

In an effort to frustrate Mittal's takeover efforts, Arcelor purchased Canadian steelmaker Dofasco, and then put it under the control of a Dutch trust. Then , in May, Arcelor audaciously announced plans to merge with Russia's second largest steelmaker, Severstal. According to the planned Severstal-Arcelor tie-up, Arcelor would have purchased a 90% stake of Severstal belonging to chief executive Alexei Mordashov (see Russia, Europe: 21 June 2006: Russian Steel Chief Proposes Improved Merger Terms to Anxious Arcelor Shareholders). Nevertheless, the daring demonstration of economic nationalism was a step too far for Arcelor's minority shareholders who not only had grave reservations over the business rationale behind the merger, but were furious that the Arcelor board willingly trampled over their rights as shareholders and pressed ahead with the Severstal deal. At the same time, Arcelor's minority shareholders highlighted the hypocrisy in Dollé's defence; the primary reason that the Arcelor board gave for rejecting Mittal's initial offer was the fears over Mittal's questionable corporate governance. However, the minority shareholders pointed out that Mordashov's close relations with Russian President Vladimir Putin, could undermine corporate governance in the merged steel giant and declared that transparency at Severstal could not compare with corporate transparency at Mittal, which has registered on a number of bourses in western Europe. Moreover, there were doubts over the accuracy of Severstal's unlisted assets and while an Arcelor-Severstal tie-up would beef up the Luxembourg-based steel giant's presence in Russia, it could not compare with the geographic reach and distribution network a merger with Mittal offers.

Outlook and Implications

Arcelor's defence against Mittal's takeover bid underlined a growth of economic nationalism across Italy, Spain, Luxembourg and France in response to a host of cross-border mergers and acquisitions over the past year. Strong corporate profits in 2004 have spurred a new wave of cross-border mergers throughout the European Union (EU), yet over the past year a number of European governments have raised the barricades in response to this corporate restructuring. The Italian government attempted to prevent the acquisition of two leading Italian banks from foreign competition, while the Spanish government has tried to repel Germany's E.ON from taking over Spanish energy company Endesa. The Arcelor-Mittal battle was another episode in this latest trend, albeit more visceral and bitter. The ultimate defeat for Arcelor's board is another encouraging sign however, as it suggests that despite Dollé's self-appointed attempts to defend European "cultural values", shareholders, and institutional investors do have the power to stand up for their rights.

The creation of a 100 Mmt steel company will also spur the ongoing consolidation within the steel industry. The industry, which is notoriously fragmented, has undergone something of a renaissance in recent years, buoyed by China's insatiable demand for steel and the drive towards profitability in a unprofitable industry as prices have risen by 6% on average between 2000-2005. Indeed, in theory an Arcelor-Mittal tie-up will lower production and operational costs, boosting profitability as Mittal and Arcelor engage on a degree of vertical integration. There are still reservations over whether a handful of consolidated global steel giants will be able to rationalise the industry and shut unprofitable steel mines. In a number of its operations, Mittal has been forced into promising to refrain from enacting job cuts in the face of government resistance and there is no reason to suggest that the merged giant will have any greater success. Nevertheless, the Mittal-Arcelor deal will act as the catalyst and a host of similar mergers within the industry are on the horizon as the consolidation process is in full swing. In the short term, the Russian government has given the green light to the merger of the Russian steel sector which the spurned Severstal may now be involved in. Roman Abramovich, Russia's richest man, agreed this month to pay an estimated US$3 billion for a 41% stake in Evraz, Russia's largest steel company, capitalising on the ongoing consolidation within the steel sector. Given his close relationship with Russian President Vladimir Putin this has led to suggestions that President Putin has requested that Abramovich return to Russia in order to drive the industry and establish a "national champion" which will act in the state's interests. Evraz appears to be Russia's national steel champion in the making and Abramovich is expected to embark on an aggressive expansion campaign which will include a number of domestic and international targets, possibly the U.K.-listed Corus Group. Other steel majors, such as Nippon Steel have indicated a willingness to capitalise on the relatively benign environment of rising demand which is spurring the consolidation in the industry.

Raul Dary

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