Mittal Steel's Lakshmi Niwas Mittal: The new Numero Uno

On the morning of august 24 this year, Lakshmi Niwas Mittal and his son Aditya paid a visit to the offices of W.L. Ross & Co. on New York's 52nd street. Mittal senior had spoken less than three weeks ago with Wilbur Ross Jr., the firm's billionaire-investor boss, but this was to be their first face-to-face meeting. If the 54-year-old Mittal, who had flown in from London in his private Gulfstream jet, was excited about the meeting (he had reason to be), he didn't show it. "On that day we exchanged each other's business strategy and discussed how both our companies could work together," recalls Ross, who two years ago had bought a few ailing steel companies in the us and built his 20-million metric tonnes (MMT) a year International Steel Group (ISG), which Mittal was now eyeing.

The meeting, though inconclusive, ended with the promise of a follow up, which the 66-year-old Ross did on October 1, when he (and ISG CEO Rodney Mott) returned Mittal's courtesy by calling on him at his London headquarters. Now, things were gathering momentum. But Ross had something more pressing to take care of: his third wedding. Although invited, Mittal was too busy to make it to the October 9 wedding, but he did remember to send Ross and his new bride a present: a jewel-encrusted silver tray with a bottle of France's rare Petrus wine (a bottle of 1897 vintage can cost £9,200, or Rs 7.36 lakh).

The two weeks that followed were no honeymoon for Ross but a whirligig of meetings. On October 25, at 6:35 pm India time, Mittal and Ross hurriedly convened a conference call for analysts and reporters around the world. At the hour-long briefing, listened in to by this writer, Mittal spoke first and announced that he was buying Ross' ISG for $4.5 billion (Rs 20,700 crore) in part cash and stock. Plain and simple. "The deal was done in 60 days flat," Ross told BT over the phone from New York, on his way to catching a flight to Boston.

THE RISE AND RISE OF L.N. MITTAL

L.N. Mittal: Man of steel Strategic ties: The Iscor Plant in South Africa In less than three decades, Mittal has made it from nowhere to the very top of the steel world. 1976: Joins Ispat Indo (65,000 mta capacity) in Indonesia, set up by his father M.L. Mittal 1989: Makes his big first move. Buys into a steel plant in Trinidad & Tobago (Caribbean Ispat: 0.9 MMTA) 1992: Buys Sicarsta of Mexico (3.4 MMTA) for $220 million, compared to the $2 billion invested by the Mexican government just a decade earlier 1994: Acquires Sidbec of Canada, which has a capacity of 1.4 MMTA 1995: Buys Ispat Hamburger Stahlwerk in Germany (0.86 MMTA) Snags Ispat Karmet in Kazakhstan (3.75 MMTA) 1996: Ispat Karmet acquires a power plant and coal mines to assure supplies 1997: Ispat International comes out with a $776 million IPO. Is listed on NYSE and Amsterdam stock exchanges. 1998: Acquires Ispat Inland in the US (5.3 MMTA) 1999: Buys Ispat Unimetal of France ISG Chairman Wilbur Ross with L.N. Mittal 2001: Beats French company Usinor to acquire Ispat Sidex in Romania (3.83 MMTA) Picks up a majority stake in Ispat Annaba in Algeria (0.95 MMTA) 2002: Strikes a strategic equity partnership with Iscor South Africa (6.25 MMTA) 2003: Acquires Ispat Nova Hut in Czech Republic (2.86 MMTA) 2004: Lines up plans for a 0.4 MMTA, $100-million cold rolling plant in China Acquires Ispat Polska Stal in Poland (6 MMTA), BH Steel of Bosnia (0.2 MMTA), and announces a merger with International Steel Group of the US (20 MMTA)

While pulling off a mega deal in less than two months is impressive in itself, it's not the speed of the dealmaking that has made the global steel industry sit up and take note. Rather, it's the size of it and what it could mean for steel manufacturers around the world. At one stroke, Mittal Steel (to be hammered out by merging flagship Ispat International with privately-held LNM Holdings) becomes the world's biggest steel maker by far (see By Far The Biggest) with 70 MT in annual capacity, $31 billion (Rs 1,42,600 crore) in revenues, $7 billion (Rs 32,200 crore) in profits, and 165,000 employees in 14 countries. Mittal Steel's closest rival, Arcelor, only has 43 MMTA (million metric tonnes per annum) in steelmaking capacity. On a personal note, the merger, after which Mittal and his family will own 88 per cent of Mittal Steel (Ross will hold about 8 per cent), also makes the steel baron Britain's richest resident and one of the world's top 15 with a net worth of about $19 billion (Rs 87,400 crore). "The deal will dramatically change the landscape of the global steel industry," says Mittal, who had long been nursing an ambition to be the world's No. 1 steelmaker.

L.N. MITTAL'S A-TEAM

Aditya Mittal President & Group CFO Designate An MBA from Wharton, 28-year-old Aditya has played a key role in all acquisitions since he joined the group in 1997. Is the anointed heir to dad Lakshmi Malay Mukherjee COO Designate This former general manager at Steel Authority of India's Bhilai plant rose to the top team as he successfully turned around the Karmet plant in Kazakhstan Rodney Mott President & CEO/ ISG Now designated as the CEO of Mittal Steel's combined US operations, Mott will be a key man given his influence with the steel industry labour unions of the US. Helped Ross turn around ISG. Sudhir Maheshwari CFO/ LNM Holdings Will play a significant role in the new entity. He has played an important role in all M&As since he joined the group in 1989 and has been the CFO of LNM Holdings since 1992 Bhikam C. Agarwal CFO/ Ispat International Will continue to have an influential role. He has been the CFO of Ispat International, Mittal's only listed company, and has 28 years of experience in steel and related industries Roeland Baan CEO (Central & Eastern Europe)/ LNM Holdings Came on board this September as the CEO of LNM's Central and Eastern Europe operations, where the group is the largest steel producer (14 million metric tonnes).

Few doubt Mittal's claim. Soon after the deal was announced, shares of Ispat International rose some 17 per cent to close at Euro 30 and those of ISG jumped higher (19 per cent) to close October 25 at $36 (Rs 1,656). "It's the first time we are seeing a major international consolidation in the industry," says Raju Daswani, Head of Research at London-based Metal Bulletin, a trade journal. Adds B. Muthuraman, MD, Tata Steel: "The industry needs stronger players."

Despite the soaring steel prices, the industry is fragmented. Before the deal, the top three producers had just a 10 per cent share of the market, but the top three iron ore (a raw material for steel) producers control three-fourths of the supplies and the top three automobile companies account for 70-80 per cent of the steel purchases. And if steelmakers' profits haven't risen in proportion to prices it's largely because of soaring iron ore and coke prices. With greater consolidation, which this deal will inevitably spur, investors expect profits and, hence, stock valuations to climb. "The jump in our stock price is a clear indication of how much investors want a consolidation in the industry," says Aditya Mittal, President & Group CFO Designate.

The Carnegie From Calcutta

Mittal's rise in the global steel industry is stuff that legends are made of. His biggest break was the 1995-acquisition of Kazakhstan's national steel plant, Karmet, for $400 million (Rs 1,400 crore at the then exchange rate). Turning around a heavily loss-making plant that employed 70,000 people in a hostile environment wasn't easy. He was not allowed to cut staff, had to take care of several social welfare costs like the running of the local tram system, schools and even the local KGB office. But there was one factor that helped him: China, which later was to suck most of the global steel demand, was just 400 miles away. Mittal hasn't looked back since. He has made more than a dozen acquisitions, mostly in erstwhile communist republics like Romania, the Czech Republic, Poland, Bosnia and even in civil war-ridden Algeria, and all of them are largest in their respective countries and regions.

Mittal is no stranger to the US market, though. He already owns a 5.3-mmt plant, Ispat Inland, in the US, but this has possibly been one of his most troublesome acquisitions-initially, the labour union was hostile to the new owner, besides which there were huge pension liabilities on Inland's books. Perhaps not coincidentally, the acquisition of ISG will help Mittal sort out the labour issues too. A few months ago, ISG's CEO Rodney Mott, who will now head Mittal Steel's US operations, had settled a similar labour agreement with the United Steelworkers of America, and could well step in to help Inland.

"NEXT STOP HAS TO BE INDIA"

In a telephonic interview from London, L.N. Mittal spoke to BT on the deal and his India plans. Excerpts: How does it feel to be the world's No. 1 steelmaker? Not very different actually. The target is not so much to be No. 1 as to bring consolidation in the steel industry, make Mittal Steel the most admired steel company, and generate returns to the shareholders. Steel consumers are already sore over soaring prices. Will consolidation evoke a backlash? Prices are a function of demand and supply, and steel prices are up also because raw material prices have jumped. The industry has suffered in the past and what you are seeing now is a balance in supply and demand. Are you worried about anti-trust issues? Even after this acquisition, we will account for just 6 per cent of the world supply. So there's no concern. Besids, lawyers from both sides (Ispat and ISG) looked at the issues and they don't foresee any problems. Will India be your next stop? First, we need to have a footprint in China. But after that next stop has to be India. If the government privatises SAIL, we will be interested. Some people accuse you of using controversial business practices. That's all nonsense. Countries where we've done business are all very happy.

Equally importantly, the deal will strengthen Mittal's position in the 120-mmta us market. ISG has close contacts with big steel consumers such as automobile and consumer appliances industries. Says Brian Rayle, steel analyst for the us-based FTN Midwest: "(The acquisition) will give the Mittal group a major foothold in the us automobile industry." ISG, too, will benefit from the synergies that Mittal's Ispat brings to the table. For instance, ISG has always been vulnerable to fluctuations in raw material prices. But now it will be spared such shocks to a large extent because Ispat owns several coal and iron ore mines. In fact, 40 per cent of the group's raw material requirements are met from its own mines. Says Mittal: "The combined entity will have both an excellent position in coal, coke and iron ore, the key inputs, and a strong presence in the end sectors."

How well positioned is Mittal to weather an industry downcycle? Better than most, say analysts. That's not just because Mittal's steel portfolio and markets are widespread, but also because Mittal is known to run a tight ship. The key to his competitiveness is his choice of the steelmaking process. Well before electric arc furnaces became the new standard compared to the more energy-inefficient blast furnaces, Mittal was onto the technology. Besides, he realised that the mushrooming of such steel mills would drive up prices of scrap metal and, therefore, placed his bets on the direct reduced iron (DRI) technology, the raw material from which currently costs $130 (Rs 5,980) per tonne compared to $250-300 (Rs 11,500-13,800) per tonne of scrap metal. He has done that with all the rust bucket factories he acquired. Finally, Mittal keeps a manic control on costs. His plant heads are expected to follow the Marwari partha system, where production and costs are measured against targets every day. He himself videoconferences with them from his London HQ at least once every week.

Still there are a few things that could upset Mittal's calculations. Foremost are anti-trust concerns. Post-merger, Mittal Steel will control 6-7 per cent of the global steel production of 1 billion tonnes. While by the standards of other industries that's hardly a significant share, soaring steel prices may well prompt the regulators to keep a close watch on Mittal. Then, China, which has been the biggest steel consumer (one-fourth of the world steel output), could slow down, creating excess capacity in the industry. Besides, Mittal's strategy so far has rested on buying steel mills at rock-bottom prices, and then turning them around into money-spewing factories. But as the ISG deal shows, buying steel companies is becoming an increasingly expensive proposition. It will get more so if his rivals, who so far have lacked either his kind of speed or money, get into the act. And one man, Guy Dolle, CEO of Arcelor, has already made known his ambitions of becoming an 80-90 MMTA capacity player. Expensive deals will make it harder for Mittal to generate the kind of returns he has in the past. That's one reason why he walked away from the deal for Venezuela's Sidor steel plant, which eventually was acquired by a consortium of South American investors.

But typical of the man who came in from nowhere to become the world's biggest steelmaker, Mittal isn't letting any of that faze him. He is raring to do more deals. Even before the ink had dried on the ISG deal, he declared his interest in buying Turkey's largest steelmaker, Eregli Demir ve Celik, expected to be privatised early next year. Besides exploring more privatisation opportunities in the CIS republics like Ukraine and Russia, Mittal is eyeing India and China, where he plans to invest $100 million (Rs 460 crore) in a cold rolling mill. Looks like steel's newest czar wants to ensure that the sun never sets on his empire.

additional reporting by Ashish Gupta

The Billionaire Steel King Lakshmi N. Mittal is as controversial as he is rich.

Despite keeping a low profile, Mittal likes to live life king-size. He forked out £57 m for a 15-bedroom mansion in Kensington Palace Gardens (top) and splurged $78 m on daughter Vanisha's wedding, held over six days in London and Paris (bottom) For a man who's spent almost a decade in Britain, L.N. Mittal managed to keep a relatively low profile until recently, when two events turned the spotlights on him. One was his purchase of a 15-bedroom mansion in the royal Kensington Palace Gardens. The mansion, previously owned by Formula One racing boss Bernie Ecclestone, was bought by Mittal for a whopping £57 million (Rs 473.10 crore) and boasts an underground parking for 20 cars. The second event was the wedding of his daughter, Vanisha, to Amit Bhatia, a London-based investment banker at Credit Suisse First Boston. Held over six days in London and Paris, the $78-million (Rs 359-crore) extravaganza was attended by the world's who's-who and featured performances by Hollywood stars such as Aishwarya Rai and Shah Rukh Khan, besides Australian pop diva Kylie Minogue. Predictably, the wedding drew a mix of awe and outrage at the ostentation. Despite his fantastic wealth, estimated at $19 billion (Rs 87,400 crore), Mittal is said to be a family man. He's been married to his wife Usha for more than 30 years now and dotes on his two children. At a recent analyst meet in Paris, when somebody asked Mittal how he intended to improve on his son's deft handling of queries earlier in the day, Mittal reportedly replied, "I don't intend to try; I intend to follow him. He is the future." As an entrepreneur, Mittal is known to be a risk-taker and driven, and has an ability to make friends all over the world. He logs more than 350,000 miles in his private jet, and has done deals that his competitors wouldn't dare touch. Like most people from his community, Mittal is a strict vegetarian, and does yoga for an hour every day. Although Mittal doesn't have any businesses in India (yet), his LNM Foundation has been doing charitable work in the areas of education and health. He has set up two technology institutes in Rajasthan, and recently donated £75,000 (Rs 62 lakh) to set up a computer centre at Bhartiya Vidya Bhawan in Kolkata. Inevitably, Mittal has his share of controversies. One even involves British pm Tony Blair, who is supposed to have helped Mittal snag the Romanian Sidex by writing to the country's pm to favour Ispat over Usinor, a French rival. Shortly before that, Mittal had donated £125,000 to Blair's Labour Party. Then, there are rumours that Mittal bribed key politicians in Kazakhstan and Trinidad & Tobago to buy the local steel plants. In fact, one of his former executives alleged on a BBC show that Mittal paid $100 million in bribes for the Kazhak acquisition. But to Mittal's credit, none of the accusations has stuck.

The Other Mittals L.N. Mittal's brothers in India are laden with huge debt and losses.

The clan: M.L. Mittal (fourth from left) with sons V.K. (third from left) and P.K. (fifth from left), and other family members When Lakshmi N. Mittal split from the family in 1995, all the overseas businesses of the Ispat Group went to him, while the Indian side of the businesses went to father Mohan Lal Mittal and his two younger sons Pramod (P.K.) and Vinod (V.K.). Since then LN and the father-sons team have chartered different paths of growth. While a risk-happy LN went globetrotting to buy out rusting steel plants, and then turning them around, his two brothers were largely confined to India, managing the Kolkata-based Ispat Industries. Now, they must wish they had got their family's modest overseas business instead. After a golden year in 1995, when Ispat Industries racked up Rs 100 crore in profits, things have been going downhill. The company, which produces sponge iron, hot rolled and cold rolled sheets from its two plants in Maharashtra, has nearly Rs 5,300 crore in debt (along with sister concern Ispat Metallics) and Rs 482 crore in accumulated losses. Although its lenders recently agreed to a debt restructuring, and the past two years of steel boom have brought in modest profits, the company is still struggling to consolidate its position in the industry. Diversification Drive While steel's poor performance in the mid-90s to early 2000 had a lot to do with Ispat's woes, a large part of it had to do with the Mittals' penchant for diversification. Unlike their more famous and successful sibling, the Mittal brothers in India have diversified into sectors such as telecom, power and real estate. But such is the dire condition of its subsidiaries that in 2002, Ispat Industries had to write off investments in two of them-Central India Coal Company and Central India Power Company. The Mittals did not speak to BT for this story. Today, things are far from happy at Ispat. It has already earned the dubious distinction of being one of the biggest defaulters of the Maharashtra State Electricity Board. Recently, the Central government ordered a probe into the company's utilisation of its borrowings, erosion of its net worth and accumulated losses. While the Kolkata High Court has restrained the Serious Fraud Investigation Office from initiating an enquiry, it has allowed the Registrar of Companies to pursue the matter. Not surprisingly, then, Ispat Industries doesn't figure on the radar of any important fund manager. The several brokerage houses that BT contacted for their view on the company said that they no longer tracked the stock. Here's why: Its stock of Rs 10 face value is currently quoting at Rs 12.50, at a time when even penny stocks in the sector have risen in the last two years. Compare that to the performance of other big steel stocks: Tata Steel is quoting at about Rs 300 and Jindal Steel at Rs 720. Staggering losses and crushing debt haven't deterred the India-based Mittals from dreaming up big plans. On the drawing board is a plan to up hot rolled coils capacity by 50 per cent to 3.6 MMT by the end of this financial year. By March 2006, Ispat wants to increase that by another half to 5 MMT. Provided, of course, they convince lenders to put more money into Ispat. -Ashish Gupta