THE newly crowned king of world steel settled into the leather armchair of his private jet as it left Luxembourg on Friday, bound for Moscow after a long but highly productive day’s work.
Earlier, at a packed press conference, Alexei Mordashov had announced a merger of his Severstal Group with the Luxembourg-based Arcelor to form a giant valued by the deal at €32 billion (£22 billion).
Mordashov’s 89% stake in Severstal will convert into a holding of nearly 30% in the combined business, worth €10 billion.
The deal offers another satisfaction, particularly for the management of Arcelor. If it goes ahead it will thwart the hostile bid for Arcelor from Mittal Steel.
The merger with Severstal was said to value Arcelor’s shares at €44 each, a significant premium to the €37 that Mittal was offering.
One London dealer said: “It’s unlikely Mittal will chase it at that price.” A Paris analyst said: “I think this is a dealbreaker for Mittal. It will be very difficult to match.”
It’s not quite that simple. The sudden emergence of the 40-year-old Mordashov as a white knight was greeted with scepticism by Arcelor’s shareholders, some of whom were upset by the lack of consultation ahead of Friday’s news.
One indicator of the scale of the doubts is the Arcelor share price. Arcelor’s shares, previously trading at about €30, moved up on the announcement of the merger, but only to €33. That is a long way short of the €44-a-share value claimed for the offer, and suggests investors do not entirely trust this ambitious merger.
Arcelor, headed by Guy Dollé, has fought a desperate battle to escape Mittal’s clutches. While Mordashov is to be president of the merged company, Dollé is to be its chief executive, and Arcelor’s Joseph Kinsch will be chairman. Arcelor will also provide much of the rest of the group’s senior managers.
Severstal makes its steel at a huge plant at Cherepovets in northern Russia, where Mordashov was a manager in his twenties. The merger with Arcelor values Severstal at €13 billion, though it is not entirely clear how that valuation was arrived at.
In many ways, Mordashov’s rise to great wealth parallels the career of Roman Abramovich, the oil billionaire best known in Britain for owning Chelsea football club.
Mordashov is the son of two steelworkers from Severstal’s home territory of western Russia. A trained engineer and accountant, he graduated from the Leningrad Institute of Engineering and Economics, and went on to collect an MBA from Northumbria University Business School in Britain.
In 1992 he became chief financial officer of Severstal.
A year later, at the age of only 27, he bought his key stake in the company through the privatisation of what was a state-owned enterprise. The company was then making a loss and was worth only $6m. He said: “I was young enough and stupid enough to have a go.”
Away from Severstal, Mordashov has private furniture and specialist-cars businesses with sales of €2 billion a year.
Speaking fluent English at Friday’s press conference, he repeatedly, and unprompted, stressed that the privatisation had been above board. He said it was “completely in line with Russian law”, adding: “I didn't make the rules of this privatisation. We just traded steel. This company was made by a decision of the local council, and it was made in very different circumstances, when the company was not as viable as it is today.”
The combined group’s operations are impressive, covering Russia, western Europe, China, South America, the United States and Canada. Its output of 70m metric tonnes a year will top Mittal, the second-biggest producer, by 10m tonnes.
Profit per tonne will be €130, against Mittal’s €92, and capital spending per tonne will be €61 compared with Mittal’s €20.
Mordashov and the 63-year-old Dollé claim to have been discussing a merger for more than a year, even getting down to price. But they couldn’t agree because Arcelor’s profits had been depressed. However, they did go ahead with joint ventures that Mittal naturally knew about. Dollé reckons that they would have merged within a year or two, but Mittal’s bid was “a catalyst”.
The question is who will run the combined Arcelor-Severstal. Mordashov has agreed to be a non-executive president, watching over a non-executive board, while the top management will be Arcelor’s.
The young Russian has also agreed to abide by decisions of the board, and not vote his powerful shareholding. He has contributed €1.25 billion cash to the merger, but insists that he will not take out any dividends or capital repayments for several years.
Dollé was optimistic about Mordashov’s intentions, but he conceded that the Russian is surrounded by an ambitious young team, several of whom have cut their teeth at McKinsey and are therefore blooded in the more ruthless, less consensual, American corporate culture.
If Mordashov is harbouring any ambitions of total control, he will have to wait. He has committed himself to not buying any more Arcelor shares for four years, nor selling any of them for five years, except a sale of no more than 5% after two years. If Mordashov ends up with more than 45% he is obliged to make a cash bid for the rest at a “fair value”.
Even though Arcelor shares have jumped since the Mittal bid, the Severstal merger is being pitched at modest price/earnings ratios — 6.0 for Arcelor and 5.6 for Severstal. This could open the way for counter-offers but, as a sweetener, up to €7.6 billion in cash is to be returned to shareholders, excluding Mordashov.
One of the battle grounds between the combined group and Mittal is expected to be China. The Beijing government was said to be against Mittal buying Arcelor, because it would have put the Chinese in a weaker bargaining position. Arcelor already has a foothold in China, and the Chinese can now look forward to the prospect of withering competition bringing down prices.
At the press conference Mordashov was closely questioned on the role of Vladamir Putin, the Russian president, in the merger. He refused to answer whether he had had direct discussions with Putin, but left no doubt that the deal had the blessing of the Russian hierarchy.
But that is only one of three regulatory hurdles that the deal faces. It also has to be approved by Brussels and Washington. Mordashov hopes that Brussels will praise the deal for producing a European world champion in the steel industry, which until recently has had troubled times with the ups and downs of Corus, the Anglo-Dutch group that includes the former British Steel.
The biggest opposition may come from Washington, which also has to consider the anti-trust implications of the merger. But Mordashov is relying on the fact that only a small part of the group’s operations will be in America.
However, the steel lobby in Washington can still pull strings, and US Steel is a powerful player on the international stage that may not welcome the new contender.
