Mittal and Tata deals differ in substance

Their personalities are vastly different, but two Indian tycoons are writing similar headline-grabbing stories in the global steel industry. However, it turns out that the deals stitched by Laxmi Niwas Mittal and Ratan Tata also differ in style and substance.

Mittal Steel Company merged with Luxembourg's Arcelor in a hostile deal, while Ratan Tata's $7.6 billion (Rs 34,200 crore) bid to take Anglo-Dutch Corus Group PLC to make it the planet's fifth largest steel maker is being billed as a copybook case in friendly acquisitions.

Mittal Steel, the world’s largest steel manufacturer with a production capacity of 60 million tonnes per annum, bid for Arcelor, which had an installed capacity of 50 million tonnes for an enterprise value of 18.9 billion euros on January 26. After a five-month battle that involved intense negotiations and lobbying with European governments, Mittal finally sealed the deal on June 27, but only after he revised his offer thrice--taking the final price paid to 26.75 billion euros ($38.3 billion).

Around the same time, the Tatas moved stealthily to get Corus. “During the course of discussions, the synergy was discussed in detail and found that operations of both the companies are complementary to each other,” said a senior official close to the deal. There were stark differences in the two deals. Mittal used his company’s market capitalisation as “acquisition currency" to pay for the merger in a stock-cum-cash deal, while the Tatas used leveraged buyout, which involves raising debt based on  future revenues of the acquiree company to pay for itself.

Tata Steel is the world's cheapest steel maker, with an attractive platform in aggressively growing Asia. This would combine well with a demand for higher-value products in a more stable European market, where Corus can gain from Tata's expertise, said Jagdishwar Toppo,analyst at Enam Securities.

“Once it happens, it clearly proves that Indians are reaching out to the global market. Among the top five companies in the world's steel sector, two companies will be managed by Indians,” said Nimesh Kampani, chairman of JM Morgan Stanley. The Mittal-Arcelor deal was aimed at global consolidation and regional leadership in places like Europe and North America, while the Tata deal is aimed at complementary opportunities, making it a matter of match than magnitude, he said. Corus Steel's net profit of $861 million is on a production of 18.2 million tonnes of steel, while Tata Steel earned $840 million on a production of 5.2 million tonnes. Tata Steel’s market cap is $6.5 million as against Corus Group's market cap of around $7.6 million. Once the Tatas are in the saddle, there are clear chances of a margin improvement for Corus, Kampani said.

Industry experts say Tata Steel will export steel slabs or raw steel to Corus for value addition. This will help in improving profit margins while offering a larger market, while Tata Steel, with cheaper technology will have access to Corus's technology for value addition to create products for which India will increasingly become a hot market.

Besides creating mammoth size, Mittal’s acquisition was also aimed at accessing markets for high-end steel. Despite making flat products in Poland, Czech Republic, Russia and Romania, Mittal on its own did not have a European footprint to address the continent's high-end auto market. Arcelor had flat product customers in the US while Mittal had captive iron-ore. Value addition has been at the heart of Mittal's bid which was nearly forced when Dofasco, a value-added player, was acquired by Arcelor. That forced Mittal to a defensive position because he did not have a value-addition firm on his portfolio.

Email Author: arunkumar@hindustantimes.com