Case Study : Merger of ARCELLOR and MITTAL
INTRODUCTION TO CASE
ArcelorMittal is the largest steel company in the world. The company was founded in 2006 when
Arcelor and Mittal Steel company merged. The company is headquartered in Luxemberg City, in
southern Luxemberg, the former seat of Arcelor.
Arcelor Mittal produces as much as 110 million tons of steel a year, about 10 percent of world
output. The company also controls the biggest bulk handling port in Mexico, from where it
imports iron ore and exports semi-finished steel products.
Laxmi Mittal (owner of Mittal Steel) is the president and chairman. Mittal's familyl holds a
43.6% stake in this company. Counting all shareholders, 50.6% will be former Arcelor
shareholders and 49.4% will be former Mittal shareholders.
In addition to Lakshmi Mittal as president and chairman, the Board of Directors of the company
consists of eighteen non-executive members with six nominated by Mittal, three chosen
independently, six nominated by Arcelor, three chosen by existing Arcelor shareholders and
three employee representatives.
Mittal Steel Announcement Offer for Arcelor Merger proposal to create first 100 million ton plus
steel producer US$40 billion merger marks step change in steel sector consolidation
Mittal Steel N.V. (“Mittal Steel”) on 27 January, launched an offer to the shareholders of Arcelor
SA (“Arcelor”) which would create the world’s first 100 million ton plus steel producer. The
offer valued each Arcelor share at €28.21 which represented a 27% premium over the closing
price and all time high on Euronext Paris of Arcelor shares on 26 January 2006, a 31% premium
over the volume weighted average price in the preceding month, and a 55% premium over the
volume weighted average share price in the preceding 12 months.
This offer valued Arcelor at an equity value of €18.6 billion on a fully diluted basis.
The new company was expected to have:
– Unprecedented scale, scope and synergies
– Pro-forma* 2005 annual revenues of approximately US$69bn and EBITDA of
US$12.6bn (*IBES estimates)
– Pro-forma market capitalisation of approximately US$40 billion
– Leading positions in NAFTA, EU, Central Europe, Africa and South America
– Expected synergies of US$1 billion from purchasing, marketing and manufacturing efficiencies
– Exceptional raw material resources with a high degree of iron-ore selfsufficiency
– Reduced volatility through geographic and product diversification
– Security of long-term contracts through high value-added products
– Low cost profile and high growth prospects from developing markets
– Leading position across a range of key product segments
– Ability to supply customers on a global basis
– A dividend policy representing c. 25% of earnings over the cycle
HIGHLIGHTS OF THE OFFER
The offer valued each Arcelor share at €28.21 which represented a 27% premium over the
closing price of Arcelor shares on Euronext Paris as of 26 January 2006, a 31% premium over
the volume weighted average price in the preceding month, and a 55% premium over the volume
weighted average share price in the preceding 12 months. Mittal Steel offerd to acquire all of the
outstanding Arcelor shares through three offers:
- a primary mixed cash and exchange offer for Arcelor shares consisting of 4 new
Mittal Steel shares and €35.25 in cash for every 5 Arcelor shares;
- a secondary cash offer consisting of €28.21 per each Arcelor share;
- a secondary exchange offer consisting of 16 new Mittal Steel shares for every 15
Arcelor shareholders could tender their shares in either the primary offer or either or both of the
secondary offers, but the two secondary offers will, in the aggregate, comprise 75% in Mittal
Steel shares and 25% in cash.
1.1 Step change in steel sector consolidation
The combination of Mittal Steel and Arcelor represents a step change in the consolidation of the
steel sector. The combined group was expected to have approximately 320,000 employees
worldwide, annual sales of more than US$69 billion and annual crude steel production of
approximately 115 million metric tons, which represents a global market share of approximately
10 per cent by volume. This transaction was expected to create a steel company with
unprecedented scale, a strong global presence and a broad based product offering. This unique
platform was expected to provide the combined company with unrivalled financial strength and
strategic flexibility to pursue growth and value creation opportunities.
1.2 Expanding geographic footprint with leading positions in a number of regions
The geographic overlap between Mittal Steel and Arcelor was limited. This combination was
expected to create a truly global steel company with leading
positions in the five main regions (South America, NAFTA, European Union, Central Europe
and Africa). Geographic diversification was expected to reduce volatility for the enlarged group
while presenting numerous strategic opportunities. Through its diverse asset base in both
emerging and developed markets, the company was expected to be ideally placed to take
advantage of multiple market opportunities.
Mittal Steel’s North American activities were to be complemented by Arcelor’s strong position
in Western Europe. These developed markets had expertise in producing highly value-added
products and provided opportunities for new product development. Mittal Steel had leading
positions in emerging markets in Eastern andCentral Europe, Asia and Africa. These regions
offered low cost production, high growth prospects and in many cases, access to significant raw
1.3 Strengthening the range of products and solutions for global customers
The enlarged group was expected to have leading positions in a number of product segments and
have the ability to supply customers across a range of geographic regions and in end-markets
such as automotive, domestic appliances, packaging, construction and oil and gas. The company
was also expected to have a strong value-added contract business which will allow for reduced
In the automotive sector, the new group was expected to be the leader in both the
European Union and NAFTA regions and will also have leading positions in South America,
Eastern Europe, Africa and Asia. In appliance and packaging, the group was expected to be the
leader in the NAFTA region and one of the leaders in the European Union. In construction, the
group will have a leading position in most of the markets it serves and a growing presence in the
oil and gas sector. The expertise of both groups in the various applications and end markets
could be combined to develop new market opportunities.
1.4 Maximising opportunities with a global distribution and trading network
Mittal Steel and Arcelor together was expected to have the ability to optimise
production and distribution on a global basis. The international production base of the group was
expected to facilitate global sourcing of materials and products that can be directed to the
markets where they are ultimately required. The combined company’s access to a broad range of
customers enabled the group to capitalise on market opportunities and expand into new areas.
The combined company was expected to eliminate cross-border trade flows and thus generate
GAINS FOR ARCELOR…
Operations in high-growth economies withlow-cost, profitable assets and localoperating
expertise in numerous emergingmarkets
Leadership position in high-end segmentsin North America, with strong R&Dcapabilities
Access to raw materials and upstreamintegration
Access to very low cost slab potential in Ukraine to serve West Europe
GAINS FOR MITTAL STEEL…
Leadership position in high-end segments in Western Europe, with strong R&D capabilities
Low-cost slab manufacturing in Brazil thatcan be expanded for export to Europe and
Increased free float and liquidity
Successful distribution business in Europe
Arcelor later implemented a white knight defence through a transaction structure contemplating
the issuance of shares to a friendly strategic partner (SeverStal of Russia), which was also a
technique allowed in certain jurisdictions in Europe (but not in the U.K.) and used in the U.S.
Just as Arcelor took actions to protect Dofasco with the S3, Arcelor believed that an opportunity
to acquire SeverStal was consistent with Arcelor’s corporate interest and should, if possible, be
presented as a viable alternative to Mittal Steel’s original offer, which Arcelor believed was an
inadequate offer. While Arcelor had a previous mandate from its shareholders to issue the
Arcelor shares proposed to be issued to Mr. Mordashov (SeverStal’s controlling shareholder), the
Arcelor Board felt it was important to give the shareholders an opportunity to express their
opinion on the transaction, in particular given the outstanding takeover offer from Mittal Steel.
The Arcelor Board called an extraordinary meeting of shareholders on June 30, 2006, to vote on
the SeverStal transaction. Unless more than 50% of the then outstanding Arcelor shares opposed
the transaction, the merger with SeverStal would proceed. While the 50% unwind mechanism
was criticised by the market, including institutional investors, the SeverStal transaction caused
Mittal Steel to increase the price of its offer and to deliver better overall corporate governance
and other terms. And in the end, the proposed SeverStal merger was unwound as over 50% of
Arcelor’s shareholders voted to unwind it.
MERGER OFFER AND SUBSEQUENT NEGOTIATIONS:
Jan 27, 2006: Mittal Steel unveils €18.6b cash and share offer for Arcelor
Jan 29: Arcelor directors reject Mittal’s offer as “150 per cent hostile”, saying the companies “do
not share same vision, business model and values”
Jan 31: Jean-Claude Juncker, prime minister of Luxembourg, which holds 5.6 per cent of
Arcelor, vows to use “all necessary means” to fend off Mittal’s unsolicited offer
Feb 16: Arcelor raises 2005 dividend by 85 per cent.
Apr 4: Arcelor says it will distribute €5bn to shareholders. Raises 2005 dividend to €1.85
Apr 28: Arcelor chairman says supervisory board would think again if Mittal made a cash
May 9: Mittal says it is willing to revise terms if Arcelor board recommends its bid
May 12: Arcelor says it will implement €5bn share buy-back
May 17: Mittal launches offer after regulators approve terms of the deal
May 18: Mittal raises offer by 34 per cent to €25.8bn with a 57 per cent increase in cash
component. New deal would relinquish Mittal family control of group.
May 25: Arcelor agrees to join forces with Russian steelmaker, Severstal
May 30: Leading Arcelor shareholders speak out against proposed Severstal merger
May 31: More than a third of Arcelor investors sign a letter demanding the right to vote on a deal
June 7: Arcelor agrees to meet representatives from Mittal
June 11: Arcelor formally rejects Mittal’s €25.8bn bid and reiterates plans to press ahead with
Severstal merger, but leaves the door open for an increased offer from Mittal and gives
shareholders the chance to vote
June 18: Arcelor cancels shareholder vote on Severstal
June 20: Spanish investor forces Severstal rethink after calling for management changes at
June 21: Severstal changes terms of its proposed merger with Arcelor to counter shareholder
June 25: Arcelor recommends upgraded €26.9bn Mittal offer after intensive talks
Finally deal was finalised when Arcelor accepted €33.5bn offer from Mittal.
ACCOUNTING AND ADJUSTMENT:
Purchase price allocation
The Company was in the process of allocating the purchase price for its acquisition of
Arcelor. It should be noted that all of the purchase price allocation adjustments made and
reflected in the Company’s December 31, 2006, financials (Income statement and Balance sheet)
were still preliminary and could materially change as a result of the finalization of the purchase
price allocation process . It was expected that this allocation would be finalized in Q2 2007.
The Company recorded the following significant preliminary purchase price adjustments:
Inventory was increased by $1.1 billion as of the acquisition date (August 1, 2006). The
pro forma income statement excludes the effects of this adjustment.
Tangible fixed assets
The Company is being assisted by an independent appraisal firm in valuing the tangible
fixed assets acquired and assessing the remaining useful lives of these assets. Based on
the preliminary estimates, the Company increased the value of the tangible fixed assets
acquired by $12.3 billion. The Company also assessed the remaining useful lives of
these assets and concluded that the assets acquired have a longer average remaining
useful life than previously estimated by Arcelor. The Company therefore estimates, on a
preliminary basis, the annual additional depreciation charge to be insignificant.
As a result of the preliminary purchase price allocation, the Company currently estimates
goodwill related to the acquisition of Arcelor at $6.6 billion. This amount is still preliminary and
could materially change as a result of the finalization of the purchase price allocation process.