Ask the expert: Mittal’s bid for Arcelor

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Mittal Steel’s hostile bid for European rival Arcelor has provoked intense controversy with howls of protectionist protest coming from France and Luxembourg. Mittal, however, argues that the logic of consolidation of the global steel industry is winning over the doubters. FT Industry Correspondent and steel expert Peter Marsh, who has followed the story from the beginning and interviewed the key players, answers your questions.

Read some of Peter’s recent articles on the Mittal bid:

Mittal seen lifting cash element of bid

How to build bridges after a hostile start

Interview: Lakshmi Mittal and Guy Dollé

Read the FT’s package of news and analysis on steel consolidation

Arcelor’s management has recently estimated they can achieve a “normalised” Ebitda level of €7,000mn going forward. If so, Arcelor would be trading on a EV/Ebitda of just above three times that normalised figure (on my numbers). Arcelor’s estimate looks a bit optimistic to me, do you believe this €7bn figure is reasonable?

Ignacio Romero, Madrid

Peter Marsh: I agree the earnings figure for the future looks quite large . I would not like to say if it was reasonable or not. I think the high earnings figure is dependent on the steel business remaining strong with prices high. My information is that there is a good chance of this happening in the next two years. What happens after this is anyone’s guess.

Do you consider the Arcelor defence strategy adequate? Isn’t it ‘old fashioned’ to be asking for help from governments?

Pablo Zalba, Spain

PM: Certainly I agree that the principle of asking governments to help you out looks old fashioned. I think in some cases governments do have a role to play in regulating takeovers and in making sure that bidders for established companies meet the proper principles of how modern companies should be run. I think Mittal satisfies these principles quite well. As to whether in this case Arcelor asked the governments of France and Luxembourg to intervene, I am not sure we can say this happened. I think the governments got involved of their own volition. Whether Arcelor encouraged them to get involved is a matter of conjecture. Arcelor says they did not encourage the governments in this. Other people say they did.

Is this all about a confrontation between the developing world and established western industry?

M. Walch, London

PM: Yes this is one of the very few instances of where you are seeing globalisation of industry in action, but with the information flow and technology and money coming more from the east than from the west. Obviously one must hedge this statement. Mr Mittal is Indian but has lived in London for at least 10 years. He does not normally spend a lot of time in Asia (although this has been increasing recently). He spends a lot of time in Europe and the US. Clearly his ethnic roots are , however, in the “east “ - in so far as this term is defined when looking at a map of the world. Although Mr Mittal’s operational HQ is in London his power base is in those parts of the world that are not regarded as the main industrial centres, such as Kazakhstan, eastern Europe, Mexico. Mr Mittal now has strong operations in the US, and he would like to have strong operations in western Europe, too - which he will get if he can take over Arcelor. But I am not sure if you are right to describe this bid as a “confrontation”. Where Mr Mittal has made acquisitions before he has been anxious to avoid confrontation and has generally managed this quite well.

Mittal’s proposed takoever of Arcelor would create a steel company producing more than 100m tonnes of steel a year and three times bigger than its next three competitors combined. If the bid is successful, how much further do you think Mittal Steel could grow before it starts running into anti-trust problems? Which regional steel markets do you think are still ripe for consolidation?

M. Jones, Nottingham

PM: If this bid succeeds Mittal Steel might want to look at Japan. If Mr Mittal combined his company with (say) Nippon Steel in Japan, he would get a big presence in Japan and in nearby markets such as South Korea. Here there would be no anti-trust issues. Also Nippon Steel is a very good company with great technology. But taking over Japanese companies is very difficult. Some people think the French do not like “outsiders” taking over their industries. But neither are the Japanese known for their receptiveness to foreign companies acquiring great Japanese national champions . That is especally if the companies in Japan are not in financial problems and are actually doing quite well - as Nippon Steel is doing now. Mr Mittal would need a lot of diplomacy to do a deal with Nippon Steel . But why not give it a try? Regarding likely future acquisitions in west Europe or the US, doing anything major would run into competition issues. So Mr Mittal would avoid this. He’d want to look at China as a place for consolidation, and India, too. And he could have a go at doing something more in Africa where Mittal Steel already has some plants in Algeria and South Africa.

We are from Asturias, in northern Spain, where some of Arcelor’s factories are located. We wish to ask: can European technology compete with cheaper labour costs? And if Mittal wins, would you expect to see the dismantling of some of Arcelor’s factories?

Juan Vega, Asturias

PM: Arcelor has in Europe some very good steel processing technology. Arcelor should be applauded for what they have done in this regard in the past 5-10 years. This technology is in Europe. Mr Mittal values this technology highly. That is one reason why he has launched the bid. But it is over-simplistic to say “European technology “ is competing with “cheaper labour costs “. In steelmaking today labour costs are not a large part of companies’ total costs. Actually Arcelor’s European steel plants - particularly the four large ones in coastal areas with access to raw materials from ports - are quite competitive compared to others around the world that (like Arcelor) have to import raw materials. (Of course they are less competitive than those plants with captive supplies of these raw materials such as iron ore and coal.) What Mr Mittal is trying to do is to get a good mix of “European technology “ and “cheaper labour costs” . He thinks he can use the high-tech processing capability of the European plants to add to his sales in high-value areas such as steel for car bodies , selling to European based car companies such as VW and Renault. In some cases, slab steel (unprocessed steel) from his low-cost plants outside western Europe could be shipped to the western European processing plants to provide a source of raw material and so cut costs. Also the technical know-how of western Europe could increase the competitiveness of his plants elsewhere - eg the plant he is building in China . The blend of the two things - high tech know-how and low cost labour - can add to Mittal Steel’s overall competitive advantage. Putting these two elements together can work well in other manufacturing industries - eg electronics manufacturing or vehicle design. There is every reason to think the blend culd work well in steelmaking too.

As to your second question, I would not expect Mr Mittal to shut down (in the forseeable future) any of the large west European steel plants that Arcelor runs, should he win the bid. I could say that for the first two years nothing much would happen - so long as the steel industry stays strong. What happens after this is anyone’s guess. It could be that primary steel processing in Europe - ie use of blast furnaces to provide liquid steel - will gradually die out (on cost grounds in western Europe over 10-20 years). But I don’t think we will be able to blame Mr Mittal for this.

How do the protagonists’ business plans (not economic models) compare? How do their management philosophies compare?

Which has the better personnel management track record with subsidiary companies?

Tony, D&E Jazzd, Pennsylvania

PM: Arcelor has done a good job in knitting together its operations following its creation from a merger in 2002. Its management has a good track record. Equally Mittal has done well in putting together a group of disparate companies around the world. Of course both companies have been aided by the generally benign climate for the world steel industry in the past five years - helped by the rise of demand in China. But it must be said that the work by both companies in helping to promote mergers in the industry - meaning there are now fewer large players in the industry - has helped to improve stability and keep steel prices quite high . My feeling is that both companies have strengths in management and I would not want to compare one with the other. I would not want to compare personnel management either. The question that shareholders have to ask is whether putting together two strong companies can make for a better combined company than leaving the two companies to work independently. If the two companies did unite, the new business would be responsible for 10 per cent of steel output globally. That might seem a lot but actually it is not that much different than the respective global share of Toyota and General Motors in the world’s vehicle industry. So a 10 per cent share can not be regarded as particularly excessive, especially given that (even if the merger happened) hundreds of steel companies would share the remaining 90 per cent of the industry.

Has Mittal paid the US$4.8bn it bid for Kryvorizhstal of Ukraine at the recent auction? If not, when are they supposed to make final payment?

Tuan Yeap

PM: You would have to ask Mr Mittal - or the Ukranian government - whether he has paid the full amount. I am not sure of the answer. But my understanding is that he has certainly made the downpayments that he was required to pay when he won the auction. He may even have paid the full sum.

NB A late addition: Mittal Steel, having read my answer, have just emailed me to say Kryvorizhstal is 100 per cent paid for.

In your experience, is an industrial plan a normal part of a deal, or is it just something the French politicians have dreamt up to try and assert their rights?

Ewan Jardine, MD, Escape Recruitment Services, Livingston

PM: I don’t think normally “industrial plans” feature in deals of this sort. The French government is behaviourally inclined to like industrial plans. Arcelor managers like industrial plans, too. Mittal Steel, I think, wants to give both of these groups a detailed view of what it would like to do with Arcelor should it win the bid. Whether the amount of detail will be enough to satisfy the French government ministers and the top people at Arcelor remains to be seen.

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