22 July 2009

How Mittal got the better of Arcelor


In January 2006, Mittal Steel, the world’s largest steelmaker by volume, stunned the business community by announcing an audacious bid for Luxembourg-based Arcelor, the largest steel producer by revenue and most advanced technologically at the time. It was a clash of steel titans. Mittal prevailed in spite of much of the European legislative machinery rallying behind Arcelor. Although the Arcelor board and management made many deft moves to ward off the hostile bid, their conduct was questionable. They made decisions without consulting the shareholders.

Mittal took a different tack. It focused on Arcelor’s shareholders, communicating its message of why the merger would be good for them. It went on the charm offensive, wooing political gatekeepers and opinion leaders, conducted investor roadshows and plant tours for shareholders and stakeholders, and mobilised shareholder activism. At the final throw of the dice, Mittal was in a position to bypass the Arcelor board and address the latter’s shareholders directly.

Arcelor, a company that represented the best of European technology and work ethics, was formed through a merger of steel companies in Luxembourg, France and Spain and had a 100-year-old history. Mittal, on the other hand, had grown mainly through salvaging failed state-owned steel companies in second-tier countries. It produced mostly low quality steel whereas Arcelor had modern manufacturing plants in high-labour-cost European countries, producing high-grade steel such as that used for cars.

As Arcelor was in an industry that is often protected by governments as a strategic asset or public enterprise, political leaders and government officials in Luxembourg, France and Spain voiced their opposition, citing job loss and misalignment of economic benefits for the European population.

Mittal’s bid needed the approval of authorities in these countries, Belgium, the Netherlands and the US, where it is listed.

The Arcelor leadership tried every means to block the takeover. It criticised Mittal’s corporate governance, including the fact that the Mittal family owned some 88% of their company and that they held a different class of shares which carry 10 votes per share. Arcelor also tried to lobby the Luxembourg government to write a takeover law in its favour and sway the opinion of the EU Competition Commissioner against the takeover.

Arcelor courted white knights from all over the world. It eventually settled on Severstal of Russia. Arcelor’s board, which, under the company’s constitution, had the power to issue up to 30% of new shares without shareholders’ approval, resolved to acquire Severstal through issue of new shares. Severstal’s owner would get a 32% stake in the merged entity. The merger contract included a hefty break-up fee should the deal not materialise.

The board’s decision would be deemed final unless shareholders holding an aggregate of more than 50% of the equity were present at a shareholders’ meeting and voted it down – an unusually high percentage given that in the past, no more than 35% of the shareholder base exercised their vote. The meeting was not scheduled until more than a month later and after the Severstal deal had been nearly finalised.

The Arcelor board declared an extraordinarily large dividend payout and announced that it would commence a huge share buyback programme sometime in the future after the dust from the bid war had settled. These were defensives measures designed to satisfy shareholders who were keen to cash in on the Mittal offer. The share buyback would reduce the number of outstanding shares and would have the effect of making Severstal’s 32% stake turn 38%, but conveniently, Severstal would not be required to make a mandatory general offer.

Arcelor’s shareholder base was fragmented, with the largest stake being 5.6% held by the Luxembourg government. There wasn’t a concerted effort by shareholders to exercise their collective rights and shareholder activism was not a trend in Europe anyway. Nevertheless, Mittal began mobilising Arcelor’s shareholders. It drafted a letter for Arcelor’s shareholders to demand that a shareholders’ meeting be held within 30 days to allow them to have a say in the matter. Arcelor’s by-laws require a petition from at least 20% of the shareholder base to convene a special meeting. The Mittal team worked the phones and eventually got 30% of the shareholder base to sign the letter.

The Arcelor leadership thought they knew what was best for the company, but with the petition, it soon became apparent to them that a number of their actions had not gone down well, especially with long-term shareholders. Shareholders’ concerns were that, first, the excessive dividend payout would diminish the company’s cash hoard, which could be put to better use for future growth. Second, issuing new shares to Severstal would dilute existing shareholders’ stakes while the valuation of Severstal’s assets to be acquired was questionable as it contained mining assets under less stringent audit regimes.

Third, the smaller Severstal would wield immense control over Arcelor, not to mention the possible influence of the Kremlin over their company, without Severstal having to make a general offer for all the shares or pay a controlling premium. Fourth, a share buyback does not create value for the business. Finally, shareholders were not pleased that the board had made decisions without calling for their vote.

Arcelor was run by steel veterans who endeared themselves to the company and industry and who often forgot their fiduciary duties to shareholders and role as custodians of the company. Although they had performed within their authority, they were overly valiant in defending their fiefdom and many of their decisions were not in the best interests of shareholders. While the Arcelor leadership questioned Mittal’s corporate governance, it had not practised what it preached.

Meanwhile, Mittal focused on addressing the concerns of Arcelor’s shareholders. It pledged to dismantle the 10 vote class of shares. It improved its corporate governance and disclosure in line with global best practices. It drew up an industrial plan that detailed how the combined group would serve the economic interests of their host nations. It communicated its vision of a consolidated steel industry, in line with a pattern of consolidation among its suppliers and consumers. Most importantly, it demonstrated that all this was in the interest of shareholders while sweetening its cash and shares offer.

In June 2006, some 58% of the shareholder base voted down the Severstal deal despite an improved counter-offer, paving the way for Mittal to complete its merger exercise. If Mittal had not engaged them constantly, Arcelor’s shareholders may not have come out in large numbers to oppose the vote, given the protectionist sentiment of the European governments and public at the time. Arcelor’s board would have managed to bring in Severstal through the back door and succeeded in other surreptitious manoeuvres to thwart Mittal, much to the long-term detriment of Arcelor’s shareholders.

Today, the merged entity ArcelorMittal, operating globally and listed on stock exchanges in six countries, is a model of corporate disclosure and regulatory compliance.

The point is, the battle for control of Arcelor was not just a matter of pricing the deal right. Ultimately, it had to make sense in terms of value creation for the shareholders. Throughout the acrimonious fight, the Arcelor leadership had steadfastly refused to consider the merits of the merger, regardless of shareholder interests. At the end of the day, it was Mittal’s attention to investor relations, corporate governance and shareholder activism that won over Arcelor shareholders.

This article was published in The Edge Malaysia on 20 July 2009.

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