All's well that...: Lakshmi Mittal (left) with Arcelor Chairman JOseph Kinsch

Good morning, Europe. Say 'hello' to globalisation. Five months after the world's #1 steel maker Lakshmi Niwas Mittal shocked Europe by announcing a hostile offer for the #2, Luxembourg-based rival, Arcelor, he's about to pull off his daring bid. But it has been hard work for the London-based Indian steel czar. When Mittal first announced his bid (on January 27), Arcelor dismissed it contemptuously and even European politicians weighed in with unprecedented vitriol. Criss-crossing Europe to woo politicians and regulators, and sweetening his bid twice in the face of a rival offer from Russia's SeverStal (which was planning a counter offer when BT went to press), Mittal has managed to win the Arcelor board over. "This is one of the greatest days in the history of Mittal Steel and a seminal event in the steel industry that will shape its future," declared Mittal in a release.

His final offer of 13 Mittal Steel shares and m150.60 (Rs 8,734.8) in cash for every 12 Arcelor shares (besides 13 Mittal Steel shares and m188.42 or Rs 8,667.32 in cash for 12 Arcelor convertible bonds) is almost 50 per cent higher than his initial offer. Eventually and at maximum, Mittal Steel will have to issue 722 million shares to Arcelor shareholders, and pay another $10.65 billion (Rs 48,990 crore) in cash. At current Mittal Steel stock price of $32.17 (June 23), the Arcelor deal value works out to $33.87 billion (Rs 1,55,802 crore). Arcelor's current market cap is about $28 billion (Rs 1,28,800 crore), up from its end-2005 one of less than $15 billion (Rs 69,000 crore). No wonder, the Arcelor management is grinning from ear to ear. "Intense discussions with Mittal Steel in the past weeks have resulted in a significantly improved offer...that the Board of Directors is unanimously recommending. The merger will give rise to the leading steel company in the world," said Chairman Joseph Kinsch.

Of that there's no doubt. Arcelor-Mittal will be the biggest steel manufacturer by far, with more than 120 million tonnes (mt) in annual capacity, $70 billion (Rs 3,22,000 crore) in revenues, 334,000 employees and $51 billion (Rs 2,34,600 crore) in market cap. The closest rival, Nippon Steel, will only have about 34 mt in steel capacity and $33.56 billion (Rs 1,54,376 crore) in consolidated sales. More importantly, Mittal Steel and Arcelor are the perfect match, both in terms of geographic locations and product portfolios. The latter is primarily a flat steel manufacturer and supplies to automotive and consumer goods companies, mainly in the European Union. While Mittal Steel, excepting its us business via the ISG acquisition, makes low-value steel in Eastern Europe and other parts of the world.

While the benefit to Arcelor shareholders has, obviously, been one part of Mittal's case for the merger, the other part has to do with the industry environment. His main point, made largely by son and Mittal Steel CFO Aditya to analysts and Arcelor's institutional shareholders, is that over the years even as the consumer industries consolidated, steel producers remained fragmented. According to Mittal Steel, over the last 30 years, the number of major car manufacturers has shrunk to 13 from 57, whereas the market share of the top five steel producers is less than 20 per cent. Even after the combined capacity of 120 mtpa, Arcelor-Mittal will have just 10 per cent of the global steel market.

Mittal's plan, however, is to create a steel giant that will dominate the industry for several decades to come. In another 10 years, the man from Kolkata expects Arcelor-Mittal to increase capacity to between 150 and 200 mtpa. Perhaps, more than the sheer capacity, it will be the combination's vertical integration that will enable it to better withstand the industry cycles. For instance, 50 per cent of the iron ore and coal that Mittal Steel consumes comes from its own mines, and it is in the process of acquiring more mines elsewhere in the world, including India, where it has proposed to set up a 12-mtpa plant in Jharkhand.

Arcelor's Kinsch: Giving in finally

The Challenges Of Integration

Yet, there are issues that the 56-year-old Mittal faces with respect to the merger. The first question is, has Mittal Steel overpaid for Arcelor? By Mittal's own initial estimate, Arcelor (even after a 27 per cent price premium) wasn't worth more than $24 billion (Rs 1,10,400 crore). But now he's paying almost 50 per cent more on that. If the argument is that the merger of industry #1 and #2 will lead to better price realisation, then anti-trust authorities would want to look at the deal more closely. But if it's efficiencies from the merger that justify the premium-which actually is more than 100 per cent if one considers Arcelor's market cap prior to the Mittal offer-then achieving them will be very difficult. Not only is there little overlap in operations between the two, but Mittal has agreed to a no-layoff-and-restructuring clause. For the record, though, Mittal expects savings of $1.6 billion (Rs 7,360 crore) from combined purchasing, marketing and manufacturing. By contrast, Mittal Steel has so far saved $150 million (Rs 690 crore) from the 20-month-old ISG merger.

The biggest hurdle stems from the fact that this is a marriage of two equally strong, but culturally different, partners, and there are serious integration issues. For instance, while it is Mittal who's buying Arcelor, the company will be called Arcelor-Mittal, and not Mittal-Arcelor. The board will comprise 18 members, but only six nominees from Mittal Steel, including three independent directors. Arcelor's 12 directors will include all the current members, including three employee representatives. The management board will comprise seven members, with four coming from Arcelor and three from Mittal. The CEO will be an Arcelor person (incumbent Guy Dolle has been asked to go), and Mittal, a non-executive President until Arcelor Chairman Kinsch retires next year, when Mittal will swap jobs with him. The President's job, vacated by Mittal, will be filled by a Kinsch nominee. (Mittal's son Aditya, who is said to have conceived the bid, will be a director.)

Steel czar Jr: Mittal's son, Aditya, is said to have spotted the Arcelor deal

No doubt, the Mittal family will own 43.6 per cent (putting its wealth at more than $22 billion or Rs 1,01,200 crore), but the Indian entrepreneur has agreed not to increase his stake beyond 45 per cent. In addition, Mittal has agreed to go along with the board's decisions for the next three years. Will an empire builder like Mittal be happy staying in a situation where he's the single-largest shareholder, but subject to an Arcelor-controlled board? There are certain circumstances under which Mittal can increase his holding, but all those require a board approval.

There's another concern that overshadows the deal. While any hostile takeover is a messy affair, this one was more so. It wasn't just the Arcelor management that gnashed teeth at Mittal. Politicians from France and Luxembourg joined ranks too, finding fault with Mittal's "grammar of business" (meaning that he didn't quite know the 'rules' of doing business in Europe). For example, Luxembourg Prime Minister Jean-Claude Juncker had publicly vowed to fight the hostile takeover attempt, and Arcelor CEO Dolle ridiculed the offer, saying Mittals would fund the takeover with "monkey money". The point: In this takeover battle, Mittal has always been seen as an outsider, and if the Arcelor management has finally capitulated, it's because of shareholder pressure. One of Mittal's challenges then will be to overcome such prejudices that will necessarily simmer under the surface even after the merger.

Despite the many potential flashpoints in the Mittal-Arcelor merger, this is a great opportunity for Mittal to graduate to world-class corporate governance standards. He built his empire over the last 30 years doing deals in some of the world's most difficult markets, buying loss-making government-owned steel companies often directly from the politicians in power. He's also used his enormous wealth to get into the good books of important political leaders such as Tony Blair, whose Labour Party in 2001 received £125,000 (Rs 82.5 lakh then) in donation from Mittal. Blair, in turn, wrote to the Romanian government, stating that selling the country's biggest steel company to Mittal would improve its chances of joining the European Union.

Such controversies are now a distant memory. The fact that Mittal has agreed to so many compromises in the Arcelor deal indicates that he truly wants to turn his steel empire into a world-class business. If he manages to make this seemingly uneasy marriage work, then he would have more than earned his position as the world's undisputed steel czar.

Food For Thought (And Sale)?
Pieces of HLL's ailing foods business could be on the block.

Perhaps the starkest difference between the Anglo-Dutch consumer goods giant Unilever and its Indian subsidiary Hindustan Lever Ltd (HLL) is the contribution of foods to total revenues. For Unilever, it's over 50 per cent. For HLL, it's just 6 per cent. It doesn't make money either. So, when reports surfaced last fortnight that HLL was putting two of its foods business, Modern Foods and the Annapurna brand, on the block it appeared that HLL was finally trying to get its food portfolio in order. Bread maker Modern Foods was acquired from the government in 2000. Annapurna has atta and salt under it, but the atta hasn't been able to set the markets on fire. If HLL does exit these two areas, it will be left with a prominent brand like Kissan (of ketchups and jams). But are Modern and Annapurna up for sale at all? HLL Executive Director (Foods Business) Sanjay Kakkar maintains foods present the company with an exciting, long-term and sustainable growth opportunity. Says Nikhil Vora, Vice-President (Research), SSKI Securities: "HLL has been fighting shy of making capital investments and resource deployment in this segment over the last few years." There is now talk that the F&B (food & beverage) business could shift to Mumbai from Bangalore. If that helps...

-Krishna Hopalan

Mid-air Collision
Jet walks out of a deal with Air Sahara and disaster.

Air Sahara's Roy (left) and Jet Airways' Goyal: A stillborn deal

An eroded share price, air-unworthy aircraft, a funds crunch-these are just a few of the reasons being bandied about for Jet Airways' proposed acquisition of Air Sahara coming unstuck. But it would seem there's also a fair bit of political intrigue to the story of this failed transaction. In Delhi's political circles, the prevalent theory is that the Congress was responsible for the deal being scuppered. Subrata Roy Sahara, Managing Worker (as he titles himself), Sahara India Parivar (SIP), is known to be close to the Samajwadi Party (SP), the political party that controls Uttar Pradesh. SIP is said to be facing cash-flow problems and the proceeds of the sale of the airline would have come in handy in other ventures, particularly real estate projects in up.

So, did the Congress, or its political allies, particularly the Nationalist Congress Party (NCP)-to which Civil Aviation Minister Praful Patel belongs-actually advise Jet Airways Chairman Naresh Goyal to call off the deal? Few would have an answer to that. What is more certain, though, is Jet wasn't particularly happy at the way things were going at Air Sahara. According to industry sources, the airline was rapidly burning through a cash pile, paying exorbitant lease rentals for its aircraft and had also lost a significant number of its pilots and aircraft engineers to rival airlines after the deal was announced. At the same time, Jet, which had raised significant sums of money through its initial public offering (IPO), was seeing its scrip being hammered on the bourses. It had lost close to half its value in the 18 months since it listed, and much of that happened after the $500-million (Rs 2,300-crore) Air Sahara acquisition was announced. In fact, in the days after the deal was called off, the scrip actually performed smartly on the exchanges, bouncing back 5 per cent.

Jet's financial results have also been a cause for concern. For the last quarter of 2005-06, "other income" and "other expenditure" stood at Rs 344 crore and Rs 767 crore, respectively, up 1,750 per cent and 70.4 per cent over the previous year's corresponding period. Net profit stood at Rs 227 crore for the quarter (Rs 133 crore for the fourth quarter of 2004-05) and Rs 452 crore for the full year (Rs 392 crore in 2004-05). Low-cost competition has clearly taken its toll. Against this backdrop, a Rs 2,300-crore acquisition doubtless sounds disastrous.

And Air Sahara? Even though the sip management has taken back control of the airline with effect from June 22, the airline has lost several pilots and mechanics during the takeover process (along with market share). Alok Sharma, President, Air Sahara, is talking tough. "Even though it will be difficult for us, we have retaken control of our airline; we will acquire new aircraft and restart our international operations as soon as possible. We will also infuse more money into the airline." Sharma is adamant that Jet did not go through with the deal because "they did not have the money to pay for it". If that's true, Jet should be glad.

-Kushan Mitra

The Bull In Indiabulls
A hedge fund sees long-term prospects for the fledgling firm.

Farallon capital management LIC is the third largest hedge fund in the world, managing assets worth $17.5 billion (Rs 80,500 crore). Since February 2004, the firm that's earned a reputation for managing funds of college endowments and educational foundations, has been particularly bullish on India. Actually make that Indiabulls, a fledgling financial services group with interests in broking and real estate, with a turnover of Rs 211 crore, net profits of Rs 74 crore, and which got listed on the Indian exchanges in September 2004. Since February 2004, when Farallon entered Indiabulls via a pre-IPO placement, it has along with its associates like FIM (a Mauritius-based investment arm of Farallon) and Oberon (a special purpose vehicle owned by Farallon) have invested over Rs 1,000 crore in various Indiabulls firms (six at last count). The biggest investment came last fortnight when Oberon bought preference shares worth Rs 644 crore in Indiabulls Financial Services (IFSL).

Promoted by three IITians-Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal-Indiabulls is in a business dominated by established universal banks, traditional broking houses and foreign companies. So, why is a San Francisco-headquartered hedge fund betting big on a company with a market capitalisation of less than a billion dollars? Promoted by one Tom Steyer, Farallon is registered as an investment advisor with the Securities Exchange Commision (sec) in the US. It manages equity capital for institutions and high net worth individuals, and has investments in distress assets, start-ups and real estate. And, of course, in Indiabulls. Two individuals of Indian origin-Rajiv Pant and Ashish Pant-sit on Farallon's investment committee, which takes the decisions on investment allocations.

"We approached Farallon for investment in our company way back in early 2000 and since then the relationship has only grown stronger and stronger," explains Gagan Banga, Director, IFSL. But what market watchers find a bit strange is Farallon's rather long-term commitment to Indiabulls. After all, hedge funds are globally known for playing the arbitrage game in different markets, and aren't exactly known for holding on to stock for too long. Concedes Banga: "Though hedge funds are known for getting in and out pretty fast, they have stayed put in Indiabulls." Then, as a primary market expert asks: "How come one of the biggest hedge funds in the world is interested only in Indiabulls, and in no other Indian stock?" You could argue that Farallon saw potential in Indiabulls. And that faith has translated into returns. At today's prices, Farallon's close to 2 per cent holding in IFSL has appreciated a little over 10 fold from Rs 7.12 crore to Rs 73.24 crore. Doubtless Farallon-Indiabulls is a win-win proposition. So far.

-Anand Adhikari

Qualcomm Feels The Heat
Is GSM really better than CDMA?

QAualcomm's Jacobs (l) and India President Kanwalinder Singh: Time to worry

Anil Ambani, it would appear, always preferred GSM to CDMA (these are the two technology platforms for delivering wireless telephony services). The younger Ambani, now Chairman of the R-ADAG Group, was seen as the driver of the Reliance Group's foray into GSM services in the mid-90s (much before Anil and elder brother Mukesh parted ways). That operation today has a little over two million subscribers. The CDMA operation started by brother Mukesh under the banner of Reliance Infocomm, but which has since entered the R-ADAG fold after last year's settlement between Dhirubhai Ambani's two sons, has close to 20 million subscribers. It's now known as Reliance Communications.

But if the younger Ambani today is visibly more bullish on GSM, and is even threatening to dump the CDMA venture, which was rolled out at a total investment of Rs 25,000 crore, that decision may have little to do with nostalgia or personal preferences. CDMA operators-not just Reliance Communications-are questioning the high royalty rates being charged by the San Diego-based designer and supplier of CDMA chipsets Qualcomm. At this stage, both the large CDMA operators in India- Reliance and Tata Teleservices- maintain that royalty charges by Qualcomm need to be reduced. It is gathered that the royalty on CDMA handsets charged by Qualcomm is at about 7 per cent of the cost of the handset as compared to about 2 per cent in the neighbouring Asian markets like China and Korea. Elsewhere, Nokia has jettisoned a CDMA joint venture with Sanyo because it finds Qualcomm's licensing terms unacceptable. Nokia is also expected to scale down its R&D and production in CDMA.

Against this backdrop, analysts wonder whether Anil Ambani's reported shift towards GSM is a genuine strategic change prompted by efficiencies and effectiveness of one technology versus the other; or is he using the GSM threat to persuade Qualcomm to reduce its royalties? Ambani is said to be eyeing the Delhi and Mumbai circles, and the 1,800 mhz frequency, under which he has sought 4.4 mhz of spectrum. These two metro circles have a total wireless subscriber base in excess of 15 million (which is 17.68 per cent of the country's subscriber pie). The average revenue per user too is highest in these metros (in excess of Rs 450 per month). An advantage for Ambani, point out industry watchers, is that the GSM foray will, apart from bringing in more subscribers, require merely an incremental capital expenditure. Given that Ambani has the basic infrastructure in place, it is estimated that he will need to make an investment of about Rs 1,000 crore for Mumbai and Delhi. The figure would have been at least 60 per cent higher if Reliance did not have a basic wireless operation in place. Says P. Phani Sekhar, who tracks telecom at Mumbai's Angel Broking: "Both Delhi and Mumbai are also very good test markets and what will not work here is unlikely to work anywhere else."

Qualcomm CEO Paul Jacobs obviously has plenty to worry about. That's why he was in India in late June, to meet with Anil Ambani, Ratan Tata and Telecom Minister Dayanidhi Maran. Qualcomm's Vice President (Division Counsel) Mike Hartogs, in a conference call with the media, said, "Discussions with respect to royalty will be with the handset manufacturers only. Today, the royalty component as a part of the handset is small and what we charge as royalty in India is among the lowest in the world and is about 15 per cent less than what we charge in China." For CDMA users, however, that may not be low enough.

-Krishna Gopalan