Ever since Lakshmi Mittal made his hostile bid for Arcelor in January, the Luxembourg-based European steel giant has been looking for a way to ward him off. Arcelor's CEO Guy Dollé and his board put their company together in 2002 to be Europe's champion, and they are enraged at Mittal's impudence in thinking he can outmanage the cream of Europe's steelmen. They are going to extraordinary lengths to stop him.
They have locked up a recent Canadian acquisition, Dofasco, in a Dutch trust. They have offered shareholders close to $10 billion in dividends and buybacks. Now comes the pièce de résistance: On May 26, Arcelor announced that it will acquire Russia's Severstal for $16.6 billion. Alexey A. Mordashov, the Russian businessman who controls the company, will contribute his 89.6% stake in Severstal, along with other assets including his ownership interest in Italian steelmaker Lucchini.
Mordashov will also make a cash payment of $1.6 billion to the new combined company. In return, he will receive 32% of an enlarged Arcelor, and 6 of the 18 seats on the board. Under a four-year standstill agreement, Mordashov has to vote his shares as the Arcelor board instructs him, which will mean a formidable bloc to oppose a Mittal takeover.
SWEET DEAL. Arcelor shareholders, who can veto the Severstal deal if over 50% oppose it, now have a complex package to evaluate. A Mittal takeover would mean a larger, more global company . But one wonders whether the two management teams can ever work together, given the months of hostile maneuvering.
Valuation of the complex Arcelor-Severstal tie-up, however, poses challenges of its own. While Arcelor is buying control of Severstal, Mordashov is also shelling out for a sizable position in Arcelor. The Luxembourg company says Mordashov is paying 44 euros or close to $56 a share vs. the roughly $48 that Mittal offered in a recently sweetened deal. If those figures are accurate, then it seems Arcelor is getting a better deal than Mittal is proposing.
But much depends on how one values the assets the Russian tycoon is using to pay for his stake. Mittal says at current market value the deal is worth only about $40 per share. "Arcelor's shareholders are being forced to hand over control of their company whilst being denied a premium," Mittal said in a statement. "Yet again the board seems to be manipulating its shareholder base to its own ends."
MAJOR DEAL. Mittal says it is determined to press ahead with its own $29 billion offer, which formally opened on May 18, for Arcelor. It will remain open for 30 business days in all jurisdictions except Spain and the U.S., where it closes on June 29. If Mittal wins, the Russian deal will be nixed.
If the Severstal-Arcelor deal goes through, though, it would create the largest steel combo in the world with about 70 million metric tons of annual production and proforma 2005 sales of $58.4 billion, according to Arcelor. Mittal's annual production is around 54 million.
Severstal would also broaden Arcelor's portfolio. Combined with Arcelor's leading position in Brazil, Severstal would give the company a big stake in Russia, another key center of low-cost steelmaking. Previously, the company was vulnerable to the critique it was mainly a Europe-based company, less global than Mittal. Arcelor is already the leading steelmaker in Europe and the top supplier to the auto industry. But a deal with Mittal would accomplish most of these goals and more.
What's certain is that the steel industry is one of the hottest merger zones on the planet, and more deals could be in the offing . Share prices of companies such as Germany's ThyssenKrupp and Britain's Corus rose on May 26 on bid anticipation. The global consolidation of a once weak and fragmented industry that Guy Dollé and Mittal have been preaching about for years is happening. This battle is about who will lead it -- a maverick entrepreneur or a hardworking Eurocrat.
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