Point's fate tied to a tug of war

Mittal might have to sell Baltimore County plant if Arcelor holds on to Canadian steelmaker Dofasco

June 27, 2006|By ALLISON CONNOLLY | ALLISON CONNOLLY,SUN REPORTER

The future of the Sparrows Point steel mill could hinge on the outcome of a tug of war between its owner, Mittal Steel Co. of London, and Luxembourg-based Arcelor SA, which agreed Sunday to merge, forming the world's largest steelmaker.

The $31.9 billion deal ends Mittal's five-month pursuit of Arcelor, which fiercely resisted a takeover by what its chief executive referred to as a producer of cheap cologne compared with Arcelor's perfume.

The new steel giant, to be called Arcelor-Mittal, would control nearly 10 percent of world steel production, churning out 120 million tons of crude steel a year and employing more than 320,000.

The combination requires the approval of Arcelor shareholders, who are scheduled to vote Friday.

Yesterday at a news conference in Luxembourg, Mittal Chairman and Chief Executive Lakshmi N. Mittal said he hoped the "marriage of reason" would end as a "marriage of hearts."

"We've been trying to persuade the bride for the past five months that we love her and she should accept the marriage proposal," Mittal joked.

Despite the betrothal, the two continue to argue over the fate of Canada's largest steel and tin producer, Dofasco Inc., which had become a bone of contention during the takeover fight. Mittal wants to sell it to settle antitrust concerns while Arcelor wants to keep it.

If Dofasco is not sold, Mittal would need to divest itself of other holdings - possibly including Sparrows Point - to appease regulators. For now, the two sides have "agreed to disagree" over what to do with Dofasco, Mittal Chief Financial Officer Aditya Mittal said during the news conference.

Mittal promised in January to sell Dofasco to German steelmaker ThyssenKrupp AG if its takeover of Arcelor was successful, a promise ThyssenKrupp said yesterday that it expected Mittal to honor.

But Arcelor reiterated yesterday that it would resist any sale of Dofasco, and under concessions it wrung from Mittal as the price for a deal, it would have plenty of clout.

Arcelor shareholders will retain majority ownership in the combined company, while Mittal would own 43.6 percent and control just six seats on the 18-member board of directors. Mittal's chief executive officer would be president while Arcelor Chairman Joseph Kinsch would become chairman of the merged company.

With such voting power, Arcelor could prevent Dofasco's sale. If that happens, Justice Department officials have said Mittal must "divest certain alternative assets to a buyer acceptable to the department."

Last month, representatives from ThyssenKrupp toured Sparrows Point and expressed interest, plant officials confirmed.

But steel consultant Christopher Plummer, managing director of Metal Strategies in West Chester, Pa., said Mittal may sell Sparrows Point regardless of its sale of Dofasco in order to raise cash.

He said Mittal is already in debt and will likely have to borrow millions of dollars to afford the purchase of debt-free Arcelor.

"They could be looking at a very substantial need for cash," Plummer said.

Analysts say the merger could take more twists and turns before Friday's vote by Arcelor shareholders.

"I'm not sure what step we're on in the square dance," said John Anton, a steel consultant with Washington-based Global Insight.

The dispute over Dofasco has its roots in the contention between Mittal and Arcelor. Late last year, Mittal and Arcelor waged a bidding war over Dofasco, which Arcelor won. In April, Arcelor purchased all of Dofasco's 78.7 million outstanding shares.

To further insulate Dofasco, Arcelor shifted its shares in Dofasco to a foundation based in the Netherlands, which prevents a sale for five years.

As a result, Arcelor retains "full control over Dofasco, including all decision-making power and all economic interest relating to Dofasco, with the exception of any decision to sell Dofasco," according to documents Dofasco filed with the U.S. Securities and Exchange Commission.

John Cirri, president of United Steelworkers Local 9477, which represents hourly Sparrows Point workers, said management also was considering the sale of Mittal's tin plant in Weirton, W.Va.

That makes sense, too, said Anton of Global Insight, because Mittal is one of the two main tin producers in the United States. If Mittal is unable to sell Dofasco, it may sell Weirton to appease regulators, Anton said.

Both Sparrows Point and Weirton would be attractive to ThyssenKrupp, Plummer said, because the German company is building a plant in Brazil that will produce 4.5 million tons of slab. ThyssenKrupp could ship the slab to Baltimore for distribution, he said, or send it to Weirton for finishing.

ThyssenKrupp is anxious to get a foothold in the North American market, Anton said, especially to be near its biggest customer, the auto industry.

Sparrows Point is more profitable and efficient than it has ever been, and its location on the Eastern seaboard makes it an attractive destination from mines in Europe, Africa and South America, Anton said.

"Sparrows Point is kind of a jewel," Anton said.

However, Dofasco already supplies the auto industry, he said, which may make it more attractive to ThyssenKrupp.

"Either would be a good match," Anton said. "There are no head-scratches on any of them."

allison.connolly@baltsun.com

The Associated Press contributed to this article.

A look at Dofasco Inc.

Founded:

1912

Headquarters:

Hamilton, Ontario

Employees:

7,200

Assets:

Three blast furnaces (two functioning), three coke plants, one basic oxygen furnace, two slab casters, hot strip rolling mill, cold rolling mill, five galvanizing lines, one tinning line

Steel shipped per year:

4.8 million tons

Major customers:

Auto industry, construction

[ Source: Dofasco]

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