AMSTERDAM/NEW YORK (Reuters) - Steel magnate Lakshmi Mittal on Monday agreed to buy International Steel Group Inc. ** for $4.5 billion and merge it with his other assets, creating the industry’s largest player at a time when steel prices are soaring. **
The deal represents a huge bet on a sector that saw many of its main players in bankruptcy just a year ago, yet has since recovered with growing demand for steel, mainly in China, India and the United States.
The new company, to be called Mittal Steel Co., will be created by the $13.3 billion combination of two steel companies controlled by Mittal and the $4.5 billion cash and stock purchase of ISG.
With more than $30 billion in annual revenues, it will gain greater control over steel pricing at a time when prices have not only soared, but perhaps peaked.
The deal is a financial coup for ISG Chairman Wilbur Ross, a former Rothschild & Co. banker who built ISG over the past few years by buying troubled companies, including Bethlehem Steel, LTV Corp. and Weirton Steel, at very low prices.
Mittal Steel, with businesses in Europe, Africa, Asia and the United States, brings an international angle to consolidation in the steel industry which has been dominated by regional mergers. The new industry leader will outstrip current global No. 1 Arcelor (CELR.PA) in terms of output.
Analysts said such deals are needed to keep the U.S. steel market healthy.
“Further consolidation continues to make the market more rational, after the series of bankruptcies” in the late 90’s and early part of the new century, said Brian Rayle, an analyst at Midwest Research in Cleveland. “This will help the U.S. market. It helps globally, but to a lesser extent.”
Under the terms of the deal, Netherlands-based Ispat International NV (ISPA.AS), which is 77-percent owned by Mittal, will buy the Mittal family’s LNM Holdings in a reverse takeover by issuing $13.3 billion in shares to form Mittal Steel.
Mittal Steel will then pay about $42 per share in cash and stock to the shareholders of ISG, one of the largest steel makers in North America.
The news sent shares in Ispat (ISPA.AS) (NYSE:IST - news), and Richfield, Ohio-based ISG surging. Despite Mittal Steel’s size, it will have only 6 percent of global output, raising expectations that many similar deals will follow and boosting shares in U.S. Steel Corp. , AK Steel and Nucor Corp.
NEW STEEL LANDSCAPE
Mittal, an Indian-born self-made billionaire who lives in the U.K. and is ranked as one of the country’s wealthiest men, created LNM Holdings in 1995 by buying unwanted steel operations and now has steel assets in South Africa, Poland, Indonesia, South Africa and Kazakhstan.
Mittal, who will be chief executive officer of Mittal Steel, said during a conference call that the new group will have an annual production capacity of 70 million tons and operations in 14 countries.
After the transactions are completed, the Mittal family will own 88 percent of the combined group, Ispat public shareholders will own 3 percent and ISG’s public shareholders will own 9 percent.
Ross, who said he paid on average $3 per share to build ISG, will remain involved in the new company, for which he has already helped negotiate a new labor contract for the Ispat operations, by owning Mittal Steel shares and becoming a member of its board.
Steel prices have soared this year, with spot prices reaching about 500 euros per ton and the cost of several grades doubling, helped by a recovering global economy.
While some global growth forecasts have been trimmed in recent weeks due to surging oil prices, the world economy is still expected to grow around 4 percent next year, underpinning demand for raw materials.
The International Iron and Steel Institute expects global steel demand growth to dip to 4 percent to 5 percent in 2005 from more than 7 percent in 2004.
Ross said he believes demand from Asia will continue to be strong. “People who have advanced theories of a hard landing in China have not spent much time in China,” Ross said in an interview with Reuters.
Shares in Ispat, which also reported a record third-quarter net profit of $460 million, surged 15.48 percent to 23.50 euros, their highest in a week, after being suspended prior to the announcement. ISG was up 25.8 percent to $37.35.
HSBC and Citigroup acted as advisors to LNM Holdings, while Credit Suisse First Boston advised Ispat and UBS and Goldman Sachs advised ISG.
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