On the surface, Lakshmi Mittal, chairman and CEO of Mittal Steel ("MT"), has won the five-month takeover battle for Luxembourg-based Arcelor, assuming the board's June 25 recommendation to accept Mittal's offer prevails. But the tycoon looks to be making such huge concessions that it almost seems a pyrrhic victory.
Mittal, whose family will have 43.5% of the shares of the new company, to be called Arcelor-Mittal, will have veto power over its fate. But he will no longer be at the steering wheel. Instead, professional executives, many of them from Arcelor, are likely to have the whip hand rather than the Indian-born, London-based entrepreneur. The Mittal family has agreed not to increase its shareholding beyond 45% for five years.
According to a June 25 press release, Mittal is paying about $50 a share for Arcelor, or $33.7 billion. That's a fat 82% premium on Arcelor's prebid value in late January, when Mittal first tabled his hostile bid. Arcelor shareholders are receiving 60% of the value of the deal, vs. 40% for Mittal shareholders, Arcelor says. (see BusinessWeek.com, 6/20/06, "Arcelor: Beginning of the End?").
While the Mittal family will be by far the largest shareholder, people associated with Arcelor will remain highly influential in the new company. According to a banking source, 12 of 18 board members will come from Arcelor, along with four out of the seven members of the management board, including the CEO. Arcelor CEO Guy Dollé will get the same role in the new company—if he chooses. At 64, Dollé is nearing retirement age.
TOUGH TESTS. Arcelor Chairman Joseph Kinsch will retain his job. When he retires, he will be succeeded by Mittal. Initially, Mittal, who has been a hands-on CEO of Mittal Steel, will be non-executive president of the new company—the same role that was allocated to Alexei Mordashov, owner of Severstal, the Russian steelmaker which Arcelor earlier agreed to buy in a $16.6 billion deal designed to frustrate Mittal. Mordashov, whose bid for quasi-control of Arcelor is now likely to be undone, will have the consolation of a $175 million breakup fee.
While Aditya Mittal, Lakshmi's young son and the chief financial officer of Mittal Steel, joins the management board of the new company, he faces tough tests if he is to ever become CEO. He will have to overcome the skepticism of board members and executives formerly associated with Arcelor.
What is in it for Mittal, who had absolute control over his own Mittal Steel? The company could not be reached for comment, but the Mittal family and shareholders will benefit from the deal despite a big dilution of control. Lakshmi Mittal's holdings now go into a larger, more conventional company, whose shares will be less volatile and more liquid. The new company will be the leading outfit in the steel industry, with 100 million metric tons of production—a kind of Holy Grail for both Mittal and Dollé, who together have led the consolidation of what had been a weak and fragmented industry.
INDUSTRY VISIONARY. Arcelor will marry its leading position in Europe, its role as top supplier to the auto industry, and its crackerjack Brazilian operation to Mittal's strengths in the former Soviet bloc, developing countries, and the U.S.
The combination of the two companies will also likely cement Mittal's status as one of the world's wealthiest entrepreneurs. Mittal Steel, with its largely emerging-markets positions and tiny float, was probably more vulnerable than Arcelor to market fluctuations.
That Mittal has made so many concessions shows how badly he wanted the deal. The combination of the two companies does help achieve his vision for the industry. In addition, Mittal Steel shares haven't performed as well as Arcelor's during the battle, and Mittal faced a tougher future if Arcelor had spurned him for a combination with the Russian rival, Severstal. (see BusinessWeek.com, 5/26/06, "Arcelor: Steeling Thunder?").
No matter who is in control, investors look likely to win. The deal has happened despite Arcelor's manuevering, which included measures such as placing a multibillion-dollar asset—Canada's Dofasco steel plant—in a Dutch trust, and the Severstal deal, which many investors opposed as arrogant and giving too much to Mordashov. If there is a worry for investors, it is that the world's top steel company will be to a great extent in the hands of technocrats, who may be overcautious, rather than Mittal, whose vision has reshaped the industry.
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