When Lakshmi Mittal, chairman and CEO of Mittal Steel, the world's largest steelmaker, surveyed the world at the end of 2005, he found himself staring at a strategic dead end. The run of privatizations of state-owned steel companies that Mittal had used to build his juggernaut was winding down.
At the same time, the prices of steel companies on the market were being bid up to astronomical levels, often thanks to competition from his most aggressive rival, Arcelor, the Luxembourg steel giant.
But the Indian-born magnate seems to have found a way out of his dilemma: On Jan. 27, Mittal launched an unexpected $22.7 billion hostile bid for Arcelor, the second-largest steel company in the world. "You don't rush into something like that, but suddenly you think, 'Why shouldn't I?'" says someone familiar with the deal.
Taking big risks
If Mittal wins Arcelor, he will be taking a big stride toward his vision of a global industry dominated by just a handful of steel companies with 100 million tons or more of production apiece. Together, Mittal and Arcelor would have about 115 million metric tons of output, several times that of competitors such as South Korea's Posco, and Nucor and US Steel in North America.
According to Mittal bid documents, the two companies would have had combined revenues of $69 billion and earnings before taxes, debt, and amoritzation (EBITDA) of $12.6 billion in 2005, along with a market capitalization in the $40 billion range. Arcelor hasn't commented beyond pointing out "the hostile character of this move that takes place without prior discussions or consultations between the companies."
Mittal, a quiet, thoughtful man who has succeeded by taking big risks, is sticking his neck way out once again. He could get bogged down in a bitter fight with Arcelor's management. And the deal might not end up looking very smart if demand for steel slumps or the world is swamped with Chinese production.
However, Mittal, at a Jan. 27 press conference in London, painted a rosy picture, with global demand increasing at 3.5% to 4.5% on an annual basis for the next decade.
Tough fight
Mittal claims he initially sought a friendly merger with Arcelor but was refbuffed. At the press conference, Mittal said he broached the idea with Arcelor CEO Guy Dolle on Jan. 14 but was turned away. There's more than a touch of irony here. Dolle and Mittal have articulated an almost identical vision of consolidation -- often at the same conferences.
The two men are also friendly. "We have put forward a proposal that shares their vision as well as our vision," Mittal said. "It is not about creating a giant, it is about creating a sustainable structure for the steel industry."
Mittal's attack comes just as Dolle is recuperating from a tough fight with Germany's ThyssenKrupp over Canada's Dofasco. Arcelor won the tussle with a bid of about $5 billion. But before announcing his bid for Arcelor, Mittal inked a separate pact with ThyssenKrupp that would allow the German company to walk away with the Canadian prize for its previous $4.7 billion offer. Mittal says that with his position in North America already strong, he has no use for Dofasco.
Strong foothold
At the end of the day it could be difficult for Dolle to refute the logic of Mittal's offer. Still, Mittal may have to raise his price, which includes a maximum of $5.7 billion in cash, with the rest coming in Mittal Steel shares. The cash will come from a consortium of banks, including Citigroup, Goldman Sachs, and HSBC.
The markets responded favorably to Mittal's move, bidding up the shares of both companies. The deal offers Arcelor shareholders a 27% premium over the previous day's closing price, which was already an all-time high.
The two companies complement each other well, combining Mittal's strength in the US and Eastern and Central Europe with Arcelor's leading position in Western Europe. Arcelor also has a strong foothold in Latin America through a major investment in Brazil.
European regulators will scrutinize the deal closely. But since Mittal is not a big player in Western Europe, it might be hard for them to find many objections. To preempt a political backlash on the Continent, Mittal has said he's willing to consider moving the combined companies' headquarters to Luxembourg, Arcelor's home, although he himself would continue to reside in London.
Started out small
If Mittal does manage to bag Arcelor, he will have achieved another major milestone in his quest to spearhead the consolidation of the world's steel industry. Beginning with a small mill in Indonesia in the 1970s, he has cobbled together a far-flung empire by buying distressed steel companies stretching from Trinidad to Romania, turning them around, and then integrating them into a carefully built network. In 2004 he became a major force in the U.S. by buying International Steel Group from workout specialist Wilbur Ross for $4.5 billion.
Throughout his career, Mittal has preached that consolidation was needed to strengthen what was a fragmented and failing industry. At the Jan. 27 press conference he said the Arcelor deal would bring about $1 billion in synergies through combined purchasing power, marketing, and more efficient manufacturing processes.
He also said Mittal Steel would gain by eliminating Arcelor as a rival bidder for companies that come on the market in the future. The addition of Arcelor would also create greater liquidity in trading of Mittal shares. At present only a thin slice of Mittal Steel shares are tradeable because the Mittal family controls the rest. The free float would increase to 43% if the deal is consummated.
But the Mittal clan would easily retain voting control, giving this man of steel plenty of leeway in plotting his next move.