Deja vu for Lakshmi Mittal? National interest and a hostile union – ET Infra

Nearly two decades ago, in 2006, Lakshmi Mittal, the man who had become a steel tycoon by buying sick steel mills across the world and then turning them around, got himself into a situation that tested his nerves of steel. He made a hostile bid for Arcelor, a European steel company with operations spread across the Continent.

The bid was a landmark moment in business because the merger would create the world’s biggest steel company. But it was a political watershed too as a man of Indian ethnicity had dared to snap up an iconic European company.

Politicians, bureaucrats, company officials and worker unions decried the hostile bid and built a big resistance to Mittal. His business was seen as culturally inferior, and thus incapable of running a company with European values. Mittal, the man of steel, pulled off the takeover successfully after months of bitter disputes, merging the two companies to create ArcelorMittal.

Today Mittal is planning to mount a bid for US Steel Corp, an iconic American company founded by JP Morgan in 1901. ArcelorMittal, the world’s second-largest steelmaker now, is considering a potential offer for US Steel, Reuters has reported, citing anonymous sources. ArcelorMittal is discussing a possible offer with its investment bankers, and there is no certainty that it will press ahead with it, the sources said. A bid for US Steel will certainly not be Mittal’s Arcelor moment. But somewhat similar themes are emerging at a far lower scale.

A bidding war and the national interest
If Mittal launches a bid, it could escalate a bidding war already underway for US Steel, following rival offers of more than $7 billion. Cleveland-Cliffs has made a cash-plus-stocks offer while Esmark’s is an all-cash offer. ArcelorMittal’s deliberations come after US Steel said on Sunday it had launched a process to explore interest from potential acquirers.

US Steel is not just any other steel company. The 122-year-old steel producer is a symbol of American industrialization having helped build a number of iconic buildings such as the United Nations building in New York and the New Orleans Superdome. If ArcelorMittal launches a bid and it is successful, it will close a chapter in American history.

Cleveland-Cliffs’ bid, which will create the largest US steelmaker, is seen as a step towards much-needed consolidation in a critical industrial sector that has shrunk over time. US production of steel totalled 80.5 million tonnes last year, compared with 1 billion tonnes from China, according to the World Steel Association. Domestic steel prices have improved since former President Donald Trump imposed tariffs on imports and demand increased from the car industry, FT has reported.

Cleveland-Cliffs said in a presentation to investors that acquiring US Steel would create “a stronger foundation for critical infrastructure and national security, along with accelerated job creation”, noting that the combined company would be the only American steel company among the world’s top 10 producers. Cleveland-Cliffs CEO Lourenco Goncalves said a tie-up between the two US steelmakers would create a “lower-cost, more innovative and stronger domestic supplier for our customers”.

If ArcelorMittal decides to buy US Steel, it will scupper any hopes of creating a mega American steel champion. ArcelorMittal is the second biggest producer in an industry now dominated by Chinese companies that have grown over the years through consolidation and government support.

The proposed acquisition would give Cleveland-Cliffs control of about 50% of the domestic flat steel market and 100% of blast furnace production, Citi analysts wrote in a note to clients, AP has reported. Since it would also create “close to a domestic monopoly” on auto body sheet steel and close to 100% of U.S. iron ore, it might attract the interest of antitrust regulators.

Workers union opposes Mittal
The union of workers at US Steel prefers Cleveland-Cliffs to ArcelorMittal, claiming that ArcelorMittal’s past treatment of workers has not been good. US Steel workers are members of the United SteelWorkers (USW) union. US Steel, however, has rebuffed Cleveland-Cliffs offer as “unreasonable”.

USW International President Tom Conway told Reuters that ArcelorMittal would be “foolish” to move ahead with a bid and that the union would not endorse any buyers other than Cleveland-Cliffs. He said he was not happy with how ArcelorMittal has treated workers in the past, without elaborating. The union said that “over the years, Cliffs has shown itself to be an outstanding employer to all of its workers”.

However, US Steel said on Thursday that its labour agreement with USW does not afford the union the right to veto a sale of the company. In a regulatory filing, U.S. Steel said its agreement with the union gives it the right to counter with its own acquisition offer for assets covered under their bargaining agreement. If the union does not make an offer its board deems superior, U.S. Steel can sell itself to the bidder of its choosing.

What it means for Mittal
ArcelorMittal has downsized itself in the US. It sold most of its operations to Cleveland-Cliffs Inc in 2020 for $1.4 billion to focus on growing markets such as India and Brazil. The US Steel acquisition will reverse its retreat from the US.

ArcelorMittal’s US footprint is currently limited to a joint venture with Nippon Steel Corp in Alabama. They own a plant that produces steel sheet products by processing semi-finished products, or slabs, procured from local and overseas suppliers. They are also investing about $1 billion in an electric arc furnace.
US Steel became an acquisition target following several quarters of falling revenue and declining profits, as it struggled with high raw material and energy costs.

US Steel’s acquisition by ArcelorMittal could be Lakshmi Mittal’s signature move of buying sick plants and then turning them around. Steel prices in the US have improved since former President Donald Trump imposed tariffs on imports and demand increased from the car industry. While many steel products are now made using the newer technology of scrap-fed electric arc furnaces, blast furnaces like the ones at the two plants in Indiana remain critical for automotive products — which make up nearly a third of total US steel demand, FT has reported.

However, Morgan Stanley analysts said in a note on Wednesday they found ArcelorMittal’s U.S. Steel bid deliberations at odds with its strategy of reducing its carbon footprint and focusing on growth in India and Brazil.

“We also see limited scope for cost synergies from such a deal,” the analysts added.

  • Published On Aug 18, 2023 at 05:22 PM IST

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