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Checkmated?
VAIJU NARAVANE
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Or will Mittal's audacious bid to take over the French steel giant Arcelor succeed?
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The announcement had the effect of a bombshell, with an almost hysterical chorus of voices raised against the "predator" from India.
Bold move: Lakshmi Mittal's bid has raised old protectionist demons. Photo: Rajeev Bhatt
ON January 27, 2006, Lakshmi Mittal, billionaire steel magnate and the world's third richest man announced he was launching a takeover offer for Luxemburg-based Arcelor, the world's second-largest steel maker. Eighty-eight per cent family-owned, Mittal Steel, the world's market leader in terms of volume and turnover, said its offer would create "the world's first 100 million ton plus steel producer."
The offer valued each Arcelor share at 28.21 — a 27 per cent premium over the closing price on 26 January 2006, a 31 per cent premium over the volume weighted average price in the preceding month, and a 55 per cent premium over the volume weighted average share price in the preceding 12 months.
Favourable market
The markets reacted favourably with share prices of both companies going up. Market analysts appeared to approve the industrial logic that propelled it and declared it was "not a bad initial offer". The bid drew intense interest from U.K. hedge funds such as Marshall Wace and GLG Partners and US funds such as Och-Ziff, Duquesne and Perry Capital. Anticipating such a move, some funds bought Arcelor shares before the bid.
Mittal explained his strategy was to consolidate the steel industry in order to better protect it from vicious boom and bust cycles that have marked it. Size and weight would give the large steel makers the capacity to control market trends and to respond with flexibility, which would give them more bargaining power with coal and iron ore suppliers. His cash and share offer would dilute his family's holdings in the company from 88 per cent to just over a half, he said. He would respect all of Arcelor's contracts with the workers and promised there would be no job cutbacks. "We buy plants to develop them, not shut them down," Mittal said.
The announcement however had the effect of a bombshell, with an almost hysterical chorus of voices raised against the "predator" from India. Guy Dollé, the CEO of Arcelor fired the first salvo. Describing Mittal's offer as "ridiculous" which would be paid in "monkey money" — a rather inelegant French expression signifying worthless currency, he said: "I do not have my son on the board." Arcelor made "perfume" while the Mittals made "eau de cologne" or commodity steel, Dolle said, dismissing his rival as "a family enterprise specialising in buying up obsolete installations at a cheap price."
The contempt and disdain in his remarks smacked of xenophobia if not outright racism. In an unsolicited interview with The Hindu, he later said he "could have over-reacted". Dolle was not the only culprit. Declarations by France's ministers of Finance and Industry, Thierry Breton and Francois Loos as well as Luxemburg Prime Minister Jean Claude Junker amounted to economic jingoism of the worst kind.
"It's a hostile bid and it requires an equally hostile response," Junker said. "Prime Minister Villepin and I tuned our violins together. I am determined to do everything possible in concert with my French and Belgian partners to stop this hostile bid. This take-over and its method are not compatible with the manner in which we the Luxembourgeois and the Europeans see globalisation."
Mittal's repeated explanations that his was an European company based in The Netherlands and listed on most major exchanges appeared to fall on deaf ears.
Reactions
French Finance Minister Thierry Breton said he was "shocked" by the way the bid was announced — without prior consultations. The Industry Minister Francois Loos went a step further when he told the French parliament: "We are opposed to the success of Mittal's public offer for Arcelor. Mittal has infringed all the rules of conduct, the grammar of international finance in this domain. You do not approach a group like Arcelor, a flower of the European economy and of the French metal industry, without giving advance warning, without talks, without a vision, without a common industrial project." Valéry Giscard d'Estaing, the former president, adding his bit, said, "the laws of a modern, liberal economy are not those of a jungle".
The rhetoric was toned down only when Indian Trade and Commerce minister Kamal Nath expressed the government's dissatisfaction over the issue in discussions with European trade Commissioner Peter Mandelson. Several declarations by workers' unions both in Europe and in the U.S. endorsing Mittal's managerial skills and employment policies also helped cool tempers and place the bid in some kind of perspective.
Personal element
The hostile comments underlined the nervousness and insecurity currently gripping Europe and highlighted the Old Continent's inability to reconcile itself to global capital movement and the instability it brings in its wake. But they also contained a terribly personal and poisonously insidious element.
For most European leaders, Mittal was a foreigner, and not just any foreigner, but one who had had the gall to flaunt his wealth in a vulgar display of bad taste. His daughter's wedding in France a year and a half ago at a cost of some 70 million did not go unnoticed and it made many a member of Europe's old business aristocracy curl up his lip in disdain.
Mittal is not considered kosher within Europe's tightly knit nexus of business and politics. He is an outsider, an interloper and even if he is able to push through his takeover bid, it will take him a long while to be accepted in the upper echelons of European business and politics.
Since the Mittal takeover bid was announced a mergers-and-acquisitions-fever appears to have gripped Europe. The continent is in the midst of a takeover boom that is sending shivers down the backs of politicians, raising old protectionist demons. In a sharp attack on rising protectionism in Europe, Charlie McCreevy, the European Union's Commissioner for Internal Market and Services, accused Poland, France and Luxemburg of trying to stop cross-border deals. He said attempts by France and Luxemburg to shield Arcelor and other companies from takeovers were out of step with decades of EU law.
And it was not just the older members of the European club that were indulging in protectionist politics, new entrants like Poland too had tried to stop the takeover of a Polish bank BPH by Unicredit an Italian banking group. The latest in this series of such skirmishes is the forced merger, performed in unseemly haste, between France's Suez and the nation's energy giant EDF, in order to stave off an offer from Italy's utilities company ENEL.
Nationalism continues to remain a potent force in Europe and France and Luxemburg both adopted "poison pill" legislation in the wake of the Mittal-Arcelor bid that will allow companies to take measures to fight off unwanted attacks. The threat of creeping protectionism strengthened when Italy's finance minister Giulio Tremonti raised the prospect of toughening Italian takeover laws in retaliation against France's efforts to deter foreign bidders from acquiring French companies. French finance minister Thierry Breton in a recent article described the government as a "stakeholder" in large national companies arguing it was in the French national interest to keep out predators.
Commentator Guy de Jonquieres writing in the Financial Times rebutted these claims saying "Mr. Breton's novel re-definition of corporate governance principles would not make him a "stakeholder" in any accepted business sense. It would, instead, give him the right to override all other parties, not least Arcelor's legal owners. The logic of his argument would entitle him to impose on the company, in the name of national interest, whatever he and his fellow ministers chose... That display of chauvinism was, like France's — and other European countries' — opposition to the Mittal bid, a response to fear of foreigners and to special pleading by the target company. But they lack even the fig leaf of an excuse that a Mittal takeover of Arcelor could lead to domination of strategic national interests by a foreign power."
Mittal will in all probability be able to force through his bid and seize the prize. Arcelor's share price has now risen to over 30 a share and market analysts say the final deal could be concluded at or just below 35 a share. The story is not over yet.
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The main players -- Mittal
THE world's largest steel company with steel plants in 14 countries, especially in Asia, Eastern Europe and America and sales office in another 11 nations. With a turnover of over $28 billion, Mittal Steel employs over 1,75,000 persons worldwide.
The company's profits in 2005 dropped to $3.4 billion from $4.7 billion in 2004. Its turnover rose to $28.1 billion from $22.2 billion in 2004 while total steel shipments amounted to 49.2 million tonnes, up from 42.1 million tonnes last year. Asked whether a higher bid was envisaged for Arcelor in light of the rejection of Mittal Steel's 18.6-billion-euro ($22 billion) takeover bid by that company's board, Mittal answered with a firm "No".
The company produces a broad range of finished and semi-finished products for the flat and long products markets for the automotive, engineering and appliance sectors.
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The main players -- Arcelor
PHOTO: AFP
THE world's second-largest steel company was created in 2002 with a merger of three European steel-makers - Usinor of France, Arbed of Luxemburg and Aceralia of Spain. The company is headquartered in Luxemburg and the Duchy is its largest shareholder with 5.6 per cent of the shares.
Arcelor operates in four market sectors, Flat Carbon Steel, Long Carbon Steel, Stainless Steel and Arcelor Steel Solutions & Services. With 94,000 associates in over 60 countries and a turnover of 30 billion in 2004, the company's main markets include automotive, construction, household appliances and packaging as well as general industry. Like Thyssenkrupp of Germany, Arcelor is expanding internationally.
In 2005 Arcelor reported outstanding results with a gross operating result of 5.6 billion and a net result, group share of 3.8 billion. Strong cash generation allowed further debt reduction of 1.3 billion in 2005.
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