Arcelor, Mittal, and Severstal
A new development in the attempt by steel's #1 company, Dutch-based Mittal Steel, to take over #2, Luxemburg's Arcelor. As notes in the Wall Street Journal ("Arcelor to Merge With Severstal In Effort to Repel Mittal", 5/27/06): "A combination of Mittal and Arcelor, the world's two top steel producers, would create an industry giant more than twice as big as its next largest competitor." The hostile takeover has been furiously resisted by Arcelor and by the French government, a country where Arcelor has strong ties. Mittal recently upped its hostile offer to $29 billion and Arcelor has loudly refused.
Now comes news that Arcelor has made a deal with Russia's Severstal instead. Arcelor plans to buy a controlling stake in Severstal for $16.6 billion. The deal is generally seen as "shark repellent," a deal that should make Arcelor indigestible by the predatory Mittal.
Arcelor and Severstal may in some ways be a better fit. They both tend to pursue higher-end steel markets, especially steel used in auto manufacture. In fact, they currently cooperate in making galvanized steel in a joint venture in Russia. Mittal is more dominant in lower-end steel.
In addition, According to the WSJ article, Severstal might have added value since "[m]ost Russian metals firms enjoy low-cost labor and have much greater control of supplies of iron ore and coking coal than their Western counterparts, insulating them from cyclical price rises of such commodities. As a result, Russian steelmakers have much higher net cash positions and operating margins than Western firms."
Severstal is one of the first Russian companies to expand abroad, with the 2003 purchase of Rouge Industries in the US and the 2005 acquisition of Italy's Lucchini SpA, both steel companies.
The move is already drawing flak. Arcelor is reportedly paying a ridiculous premium to Severstal stockholders to make the deal, and diluting the value of its own stock. And that in turn may cause the Arcelor stockholders to refuse to ratify the deal. In any case, whether successful or not, the move will strike even more panic into smaller steel firms that will feel it even more urgent to consolidate themselves. thanks to the iron ore oligopoly and falling prcies.
