Posted on Sun, Mar. 05, 2006

Mittal Steel's bid for Arcelor puts U.S. mills in spotlight; more deals seen

DAVE CARPENTER

Associated Press

CHICAGO - A rival's gibe comparing its product to cheap cologne sent Mittal Steel Co. executives to the southern end of Lake Michigan with foreign journalists in tow last week to show off the expensive stuff.

If the Dutch steelmaker's charm offensive succeeds, the high-end "perfume" manufactured at its plant in Burns Harbor, Ind., will smell sweet enough to skeptics to ease resistance to its hostile takeover bid for European competitor Arcelor SA.

But even if it fails and the largest-ever proposed steel merger goes sour, experts say that won't stop Mittal's relentless global buying spree - or further consolidation of the fragmented steel industry.

"They're not done by any means," said steel industry analyst Scott Burns of Morningstar Inc.

Combining Mittal and Luxembourg-based Arcelor, the two biggest steel manufacturers, would create a company with production capacity of nearly 130 million tons a year, 3 1/2 times the output of the nearest competitor. India-born businessman Lakshmi Mittal already has his company over 70 million tons after more than a dozen acquisitions, including the 2005 purchase of International Steel Group Inc. that made it No. 1.

Without tipping their hand specifically, Mittal executives talked extensively during a two-day press tour of the need for more consolidation in order to reduce price volatility and create more growth opportunities.

"Whether he gets Arcelor or not, he will continue to acquire and will be in excess of 100 million tons five years from now," said Tony Taccone, a steel industry consultant in Pittsburgh with First River Consulting.

For now, Rotterdam-based Mittal is plowing its resources into a high-powered public relations and lobbying campaign to ensure the biggest deal yet gets done.

European regulators are expected to rule on the acquisition by early April, then Arcelor shareholders will have up to two months to vote on it. The governments of France, Luxembourg and Belgium - home to thousands of Arcelor workers - have voiced concern about corporate governance since the Mittal family would retain majority control of the merged company.

Arcelor itself is putting up one of the biggest roadblocks, campaigning to thwart the unsolicited offer. CEO Guy Dolle said the bid undervalues his company and complained that Mittal's strengths are in low-end steel, unlike Arcelor's high-end products: "There are those who specialize in perfume, such as Arcelor, and others who are more in commodities - one could say in eau de cologne."

Mittal's response: Fly dozens of Europe-based reporters to Chicago, its new U.S. headquarters city, to see slick video presentations and grill its top executives. Then bus them to Burns Harbor, the most modern integrated steel plant in the United States and former flagship of Bethlehem Steel, where high-end products are made for the automotive industry. Mittal also operates a mill in nearby East Chicago, Ind.

Aditya Mittal, Lakshmi's 30-year-old son and the company's president and chief financial officer, couldn't resist a playful rebuttal to Dolle's dig without mentioning it. "Clearly our developed markets' assets are what some might say the perfume of our business, and our developing markets - this is more the cologne of our business," he said.

While the PR blitz could risk turning off Arcelor shareholders, analysts in the United States and Europe say Mittal's straightforward and relatively open approach during the merger process appears to have shortened the odds of it going through in some form.

"When it was first announced, I thought the chance was zero," said Taccone, citing the fact the 18.6-billion-euro ($22 billion) cash-and-stock offer is "not quite as rich" as some recent deals. "But every day that passes, I think the chance goes up a bit."

Analyst Michelle Applebaum of Applebaum Research recalled that when Mittal bought Inland Steel Co. of Indiana in 1998, there were similar concerns in the industry about the capabilities of an overseas company that didn't produce high-end automotive steel.

"People were saying, 'They haven't ever made this type of steel before, can they do it?' I was skeptical, too," she said. "But Mittal doesn't need to know how to do it. They've retained all the top management. When they acquired Inland ... they invested well and they optimized."

U.S. steelmaking isn't expected to be affected dramatically by a merger, since Mittal already is the leading producer in North America and Arcelor's strengths lie elsewhere. The industrywide trend of reducing jobs through attrition and automation will continue; "Our goal is to drive that number as low as we can go," said plant General Manager Jim Hrusovsky at Burns Harbor, which employs 3,764 people averaging age 50.

But the deal would put more pressure on other U.S. producers, including Nucor Corp. and United States Steel Corp., to not be left behind as consolidation continues internationally.

"The U.S. Steels and the Nucors of the world will be put in the position where they have to get more aggressive on the acquisition front or they'll get bought," Taccone said. "In this kind of environment you're either a buyer or a seller - there's no middle ground."