THE Severstal steel plant at Cherepovets in northern Russia is easy to spot from a distance. Its towering chimneys fill the horizon and push a wide brown smear of smoke into the sky, like a child’s chocolate fingerprint on a refrigerator door.
Cherepovets is the product of old-style Soviet planning on a heroic scale. Construction of the 5,500-hectare plant was ordered by the politburo in 1940.
Soviet leaders wanted a steel facility at the junction of the inland waterways linking the Baltic in the north to the Caspian Sea in the south. Cherepovets churns out 11m tonnes of steel a year, making it one the biggest mills in the world.
Now it is at the centre of a capitalist takeover drama that would have horrified its communist planners. The plant is the financial powerhouse behind Severstal’s oligarch owner, Alexei Mordashov, a man with a personal fortune estimated at £2.7 billion.
Mordashov plans to become a big player in the world steel industry by snatching Arcelor, Europe’s biggest steelmaker, from under the nose of Lakshmi Mittal, Britain’s richest man.
The battle between Mordashov and Arcelor’s management on one side and Mittal on the other is one of the takeover stories of the year. Mittal’s £17.8 billion hostile bid has been fiercely resisted by Arcelor, which turned to Mordashov as a white knight.
The two sides’ manoeuvring has made the struggle complicated and its outcome impossible to predict. Barring any further twists in the plot, Arcelor’s fate now rests on a series of shareholder votes over the next fortnight.
In the red glow that suffuses the area at the foot of Cherepovets’ blast furnace No5, the boardroom battles seem a long way away. The glow comes from the continuous stream of red-hot iron that pours from the bottom of the furnace.
It is, plant managers boast, one of only four of its size in the world, a behemoth that can produce 11,000 tonnes of steel a day. While Cherepovets dates back 50 years, blast furnace No5 is, as blast furnaces go, a youngster. It was erected in 1985, and is an example of the continuous investment that has kept Severstal up to scratch.
In the control rooms that monitor the plant, Soviet-era panels, with Bakelite phones, analogue dials and man-sized levers, have been pushed to the back to make way for banks of computers. Mordashov wants Arcelor shareholders to believe a similar transition has taken place at the top of the company, with western corporate governance standards having replaced Soviet controls.
With excellent English (thanks in part to his studying for an MBA at the University of Northumbria) and a self- effacing manner, Mordashov himself is perhaps the best answer to those wary of doing business with oligarchs.
“We have suffered a lot from a lack of information about our business, and from prejudice — prejudice about Russia, and about the Russian steel business. But I think this deal (the merger with Arcelor) shows the possibility of Russians and western business people doing a deal together.”
If he is successful with Arcelor, Mordashov will achieve a breakthrough for Russian business. He will become the first oligarch ever to inject his Russian assets into an established western company. His proposals have, importantly, won the public backing of the Russian president, Vladimir Putin.
Mordashov said continuing distrust of Russian business by the West could make it harder to do more deals like this.
“Time will help a lot, but I am concerned about this prejudice because, if it continues, it risks creating a mirror effect in Russia that would create more mistrust. We (Russia and the West) have so much in common, and we have so much to do together.”
Mordashov had been considering a stock-market float of Severstal before Arcelor — spurred by Mittal’s hostile approach — came knocking.
His proposal for Arcelor is straightforward. He will inject his entire business — not only the quoted Severstal assets, but also his privately held iron-ore and coal mines, which feed the steel plants — into Arcelor, plus £850m in cash. In return he will take a 32.2% stake in the merged business, and has agreed to vote with the new board’s recommendations for the next three years.
It should leave Mordashov with a simple minority stake, but some Arcelor shareholders are worried that in reality he will be pulling the strings.
Last week he admitted he would be chairman of a special committee that would approve “key strategic decisions” before they were sent to the board.
Critics have also singled out a filing made by Mordashov to the European Commission about the deal, normally something done only by the party taking control in a takeover.
Mordashov rejected the claims, saying he is not intererested in who controls the new group.
“It’s not about being in control, it’s about the creation of value. I would never do anything to damage the value of the company’s shares,” he said.
While Mordashov is calm, there are signs that the battle with Mittal could become as hot as blast furnace No5. Both sides have traded insults over their corporate governance.
Thomas Veraszto, an Austrian who is one of Mordashov’s key lieutenants, returned to the fray last week, saying recent changes to make Mittal Steel more shareholder-friendly were window dressing. “If he believes in these changes so much why does he make them conditional on the deal with Arcelor,” asked Veraszto.
Veraszto was also critical of the prices Mittal has paid for recent acquisitions, particularly the £2.5 billion for the Ukrainian company Kryvorizhstal. “It’s a piece of crap, and you can quote me on that,” he said.
Mordashov regards Severstal as the firm favourite to win Arcelor’s hand, saying that he has a “done deal”. But the plans could still be derailed.
Arcelor will hold its annual meeting on June 30, at which the Severstal merger will be deemed to be approved unless more than 50% of shareholders vote against it — an arrangement that has drawn considerable flak from some Arcelor investors.
Marshalled by Goldman Sachs, the American investment bank that is advising Mittal Steel, they have written to Arcelor demanding a separate meeting on the Severstal deal, and that the merger should only go ahead if two-thirds of shareholders vote in favour.
Even if the June 30 meeting does not overturn the agreement, the Severstal deal could be aborted.
Mittal’s offer, under which he would pay the equivalent of €38 for each Arcelor share, does not close until July 5.
Mittal could yet increase his offer, something that most bankers involved in the negotiations expect him to do.
If he wins more than 50% of the shares, Mordashov has the right to walk away.
And even if Mittal gets less than 50% of the shares in Arcelor, Mordashov retains the right to pull out of the deal within three months.
The Russian said that at present he was minded to stay, even with Mittal as a significant minority shareholder — holding out the intriguing prospect of a long-running battle between two titans of the steel industry for control of the European leader.
