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NRI, Mittal
made a $22.8 billion offer to take over its rival, Arcelor

LONDON, Jan 28, 2006
Ram Mahant

NRI, Lakshmi Mittal, steel tycoon, the world's largest steel producer made a $22.8 billion offer on Friday to take over its rival, Arcelor

Mr. Mittal told news conference that the proposed merger of the world's first and second largest steel groups would create a $ 40 billion company making more than 100 million tonnes of steel a year.

Mr. Mittal said his company, which first approached Arcelor on January 13 for the merger bid without response, was offering $ 22.7 billion [18.6 billion euros]to the shareholders of the Luxembourg-based firm.

Mittal offered cash and shares for European market leader Arcelor in what would be the biggest deal the industry has seen. The shake-up includes a side deal to sell on Canadian steelmaker Dofasco Inc

A combination with Arcelor, itself the product of a merger of French, Spanish and Luxembourg companies, would create an even greater steel giant with a leading position in the Americas, Europe and Africa, annual revenue of nearly $70 billion and 320,000 employees

"This is a great opportunity for us to take the steel industry to the next level," Mittal said at a news conference in London. "Our customers are becoming global, our suppliers are becoming global, everyone is looking for a stronger global player."

FOCUS: Mittal-Arcelor Deal Would Create Steel Powerhouse


LONDON, Jan 28, 2006
Jackie Range
(Dow Jones)

Mittal Steel (MT) offered EUR18.6 billion for rival Arcelor (5786.FR) Friday in a hostile bid that proposes to unite the world's two biggest steel companies into one powerhouse almost four times larger than its nearest rival.

Mittal's unsolicited approach to Luxembourg-based Arcelor is the latest example of the company's bold push to consolidate an industry that analysts and participants have long said suffers from too many producers. Arcelor has also been a key player in the consolidation.

Whether Mittal will succeed is unclear.

Arcelor rejected the offer and the French government said it has "great concerns" about the merger. Arcelor has plants in France. The company's board is expected to meet Sunday or Monday.

The market sent Arcelor's Paris-listed shares soaring 29%, to EUR28.6. Mittal shares listed in Amsterdam closed up 6.2%, at EUR27.63. Steel shares around the world also rose.

"Both Mittal Steel and Arcelor have been at the forefront of ... consolidation and share a similar vision for the future of our industry," Mittal Chairman and Chief Executive Lakshmi Mittal said in a statement. "This combination accelerates this process.

Mittal said at a news conference Friday that Arcelor Chief Executive Guy Dolle wasn't positive about the approach a few weeks ago, but Mittal said he was confident Arcelor's shareholders will back the bid.

If Mittal succeeds in acquiring Arcelor, it will have bought about 70 million tons of crude steel production since the start of 2005.

The idea that Mittal would bid for Arcelor "never entered anyone's mind," said a steel analyst who requested anonymity. It should have been obvious, he added, considering the companies' lack of overlap.

A tie-up between the two companies would create a company with $70 billion a year in revenue and the most global production capacity in the industry. Arcelor is primarily a European producer while Mittal is scattered around the globe.

"There's a huge gap opening up now," between the first and second tier of steelmakers, said Steve Mackrell, director of operations for the London-based Iron and Steel Statistics bureau.

The next largest producers after Mittal and Arcelor are Nippon Steel Corp (5401.TO), JFE (5411.TO)and Posco (PKX), all of which would be making around of 30 million tons per year, said Mackrell.

He described the proposed merger "a huge step in the pace of consolidation. It makes steel a very different proposition." Previously steel has been "squeezed at either end" by raw materials producers and steel end users.

While a combined Mittal-Arcelor company - Mittal said Friday he hasn't decided on a name - would still have less market share than is common among its suppliers and customers, it would change the landscape, said Mackrell.

It potentially creates a "strong global player who can have a stronger bargaining position with raw materials supply," he said, "which will include people like the iron ore producers, ferrous scrap supply and metallurgical coke producers."

The world's three biggest iron ore producers, BHP Billiton,(BHP) CVRD & Rio Tinto (RTP), control about 75% of production of steel's major raw material and the top 3 car companies have about 30% of global sales.

By contrast, Mittal, Arcelor and the next biggest steel maker would have about 13% of the steel market.

Rabo Securities analyst Richard Brakenhoff, who called Mittal's surprise move "ambitious, but smart," cast doubt on how effective it would be leveraging prices with suppliers and customers.

"Even though they will be producing 100 million tons this won't give them pricing power because the market is still very fragmented," he told Associated Press. "They are still too small for that but it will give them a huge advantage over competitors in terms of cost savings and know-how in the fields of automotive and construction."

The Iron and Steel Statistics bureau's Mackrell said that a tie-up would start to address the industry problem of "gluts of steel going to market.

"By these two giants coming together it will rationalize their capacity plans (and) therefore help to avoid too much new capacity coming on stream. In the future it would help to avoid this runaway needless overcapacity."

Arcelor-Mittal's combined 115 million tons of steel would give it about 10.5% of the world's crude steel output, which the International Iron & Steel Institute put at 1.1 billion tons in 2005. London-based Mittal expects $1 billion in synergies from purchasing, marketing and manufacturing efficiencies and said the deal would give it leading positions in the United States, Europe, Africa and South America.

Mittal would become the leader in providing steel to the automotive industry in Europe and the U.S., and would lead in the North American Free Trade Area in appliances and packaging

Although steel companies have profited from high prices in recent years, the industry's cyclical nature regularly puts producers into deep financial difficulty. One reason is that the many producers continue to produce too much during the downturn. Consolidation also could improve the negotiations with customers and suppleirs.

"We're watching developments closely," said a spokesman for French automaker PSA Peugeot-Citroen (12150.FR). "We don't have any specific view on it (the possibility of a mega-merger in the steel sector) but Peugeot-Citroen is particularly attentive regarding competition among its suppliers. We've already had some concerns about the level of competition in the steel industry."

Mittal, the major shareholder of Mittal Steel, has been the leading proponent of consolidation - closely followed by Arcelor itself. Since the start of 2005, Mittal has merged with the International Steel Group in the U.S., bought Ukraine's Kryvorizhstal late in 2005, and has now made a move to acquire Arcelor.

Mittal's agility was also evident Friday in the Arcelor news. Although Mittal said he approached Arcelor on Jan. 14 and that Dolle didn't like the idea, Arcelor was only Friday assembling a team of bankers to address the bid.

The bid came within days of Arcelor winning the bidding for Canada's Dofasco. Mittal announced it had agreed to sell Dofasco to ThyssenKrupp AG (TKA.XE), the losing bidder in the competition for the Canadian company, for C$68 per share.

Still, the Mittals' nimble footwork in future consolidations could be reduced by a cash and share proposal that would dilute the family's own stake in the combined company and possibly require them - Lakshmi Mittal's son, Aditya Mittal, is president and chief financial officer - to consult more widely in future takeovers.

Moody's Investors Service Inc. rates Mittal just one notch inside investment grade and the ratings agency recently noted the company's rapid buildup of debt, heavy exposure to emerging markets and the tightly-held family ownership structure.

Mittal Steel's EUR28.21-a-share bid for Arcelor offers Arcelor shareholders four Mittal Steel shares and EUR35.25 for every five Arcelor shares. A secondary offer consists of EUR28.21 for each Arcelor share.

Arcelor shareholders will be able to choose from a mix of cash or stock in any proportion, provided that the aggregate amount paid to Arcelor shareholders is paid 25% cash, 75% stock. Mittal said, however, it won't pay out more than EUR4.7 billion in cash.

Arcelor was formed by the merger of Luxembourg's Arbed, Spain's Aceralia and France's Usinor in 2002. Its production facilities are concentrated heavily in Belgium, France and Spain while Mittal has operations in 16 countries, employs 164,000 and in 2004 had revenue of $31 billion.

Arcelor's 2004 turnover was EUR30 billion on 44 million tons of production. The company had 94,000 employees at end 2004.

Both Mittal and Arcelor have been seeking low-cost producers in new markets, or acquisitions which consolidate their positions in existing markets.

The past six months has witnessed some blockbuster deals in the sector.

In addition to Arcelor's outbidding ThyssenKrupp for Dofasco with a hefty EUR3.95 billion for the asset. Mittal's $4.8 billion bid beat Arcelor for Kryvorizhstal.

Arcelor also initially lost out in an auction for a majority stake in Turkey's state-owned Eregli Iron & Steel Works Co., or Erdemir, which was bought by a pension fund in Turkey. But in December Arcelor announced it was helping to fund the pension fund's purchase and acquiring a 20% indirect stake in Erdemir for about $1 billion.

"You can't really fault the Mittals for a pretty smart piece of business," said a steel analyst, as the move for Arcelor "fulfills everything" Mittal said it was going to do.

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