After months of maneuvers, Lakshmi Mittal's quest for the steelmaker may well come down to this: He pays top dollar -- or faces far stiffer competition
When Lakshmi Mittal announced his hostile bid for Luxembourg-based rival steelmaker Arcelor in January, 2006, the chairman and chief executive officer of Mittal Steel (MT) triggered a battle royal that has now raged for five months. Arcelor's defenders, who include bankers from Morgan Stanley, Deutsche Bank, and Merrill Lynch, have tried hard to block the deal. They have attempted to tie up a major asset, Canadian steelmaker Dofasco, in a Dutch trust. They've also tried striking a $16.6 billion deal to swap 38% of Arcelor to a Russian oligarch, Alexei Mordashov, in return for his company, Severstal.
Obfuscation has ruled the day, but now the tide seems to be shifting in Mittal's favor. On June 19, Arcelor called off a shareholders' meeting it had scheduled for June 21 to approve a planned $8.1 billion share buyback in connection with the Severstal acquisition. Then, late on June 20, Mordashov made a revised proposal that would give him only 25% of Arcelor. The less-favorable terms, which would value Arcelor at $2.5 billion more than before, apparently came under pressure from dissident Arcelor shareholders, who increasingly see a Mittal takeover as more attractive than the complicated Severstal swap.
Other big deadlines loomed, including an Arcelor shareholders' meeting to approve the potential Severstal deal at the end of June and the expiration of Mittal's offer for Arcelor in early July. But on June 21, trading in Arcelor shares was suspended as the company's management announced it was canceling the June 30 shareholders' meeting and would instead hold an emergency board meeting on June 25 to weigh the latest proposals from Mittal and Mordashov.
But some observers think that all the corporate maneuvering will eventually prove secondary. "At the end of the day, cash will talk," said one person familiar with the situation, who predicted that Mittal will sweeten his already once-improved offer enough to sweep away Arcelor's objections.
CRUCIAL VOTE. Mittal would appear to face an unpalatable dilemma. Either he pays a very high price for Arcelor, or he will have to deal with a tougher steel industry led by a strengthened Arcelor/Severstal combination. In contrast to Arcelor's soaring stock price, his own Mittal Steel shares, now at about $32, have performed poorly of late.
Arcelor said the cancellation of its meeting was taken "in light of the current discussions" with Mittal Steel "and in order not to impair any solution for the future of Arcelor," but many observers think it became clear to Arcelor's board that it was going to lose the vote. A big blow was the opposition to the share buyback of savvy French investor Romain Zaleski, who has upped his stake to 7.44%. The scrubbed meeting was the second straight win for Mittal, which had already seen Arcelor's board instruct management to sit down for talks with Mittal's team.
But after all this fuss, is Arcelor finally getting ready to yield to Mittal? "It is hard to tell—it is a work in progress," says Wilbur Ross, the U.S. investor who serves on the Mittal Steel board and is a large shareholder in the company. Arcelor could come under huge pressure if it sees that it is going to lose the vote on Severstal on June 30.
Mordashov's new terms lessen the control he could exert over Arcelor, while putting more money into the hands of its shareholders. But they could still balk. Because of the complex procedures required to vote, Arcelor will have a good idea as soon as June 23 how the Severstal vote is likely to go. If it is bad news, Arcelor Chairman Joseph Kinsch will have to scramble to cut a deal.
LUCRATIVE DEFENSE. A big question is whether the Arcelor board is made up of pragmatists who will finally strike the deal that is best for its shareholders, or whether they will do anything to frustrate the Indian-born raider—shareholders be damned. Arcelor's board and management have taken a thorough beating in the business press, but some people close to the board say that the company's defense strategy has been misrepresented.
Kinsch, in this view, has been merely trying to get the best deal for shareholders by creating real competition for control of the company. Mittal's first bid was far too low in the board's view, and all the twisting and turning was designed to gain recognition of Arcelor's value and attract suitors. The banks scoured the world for white knights, sounding out at least four other prospects, before they produced Mordashov.
The company's spirited, no-holds-barred defense has certainly succeeded at driving up the price of Arcelor's shares — since the beginning of the takeover fight, it has risen nearly 60%. And the price is still rising.
BIDDING WAR? As mandated by the board, Arcelor's management has been holding meetings with a Mittal team. Ross says, "It is too early to tell whether (the talks) will lead to a friendly transaction." One meeting has occurred between Kinsch, the Arcelor chairman, and Lakshmi Mittal and his son and CFO Aditya. Arcelor CEO Guy Dollé, who has been bitterly opposed to a Mittal merger, has not showed. One well-informed source said the talks were a sort of holding action while the players prepared their next big steps.
Arcelor and its defense team may be hoping that they can spark another flurry of bidding. Already Mittal has been persuaded to take his bid up 34% to $32.4 billion. Takeover pros say this jump was extraordinarily high considering that it didn't come with a board recommendation.
Indeed, the Arcelor side is clearly pressuring Mittal to raise his offer. It also may be hoping to spark a bidding war between Mordashov and Mittal for Arcelor. Asked if he would change the terms of his deal with Arcelor in the event of a higher Mittal bid, Mordashov said early on June 20: "We will see. If he changes his bid, we will see." Later the same day, he made his move. Arcelor shareholders are licking their chops.
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