DUTCH VIEWS ON MITTAL'S TAKEOVER BID FOR ARCELOR

UNCLAS SECTION 01 OF 02 THE HAGUE 000253 SIPDIS EU MEMBER STATES SENSITIVE STATE FOR EUR/UBI, EUR/ERA, EB/TPP/BTA STATE PLEASE PASS USTR E.O. 12356: N/A TAGS: EIND ECON ETRD LU NL OECD EUN SUBJECT: DUTCH VIEWS ON MITTAL'S TAKEOVER BID FOR ARCELOR REF: A) LUXEMBOURG 31 B) LUXEMBOURG 45 ¶1. (SBU) SUMMARY. Dutch industry and financial experts see Amsterdam-traded Mittal Steel's takeover bid for Arcelor as part of a continuing consolidation of the European steel industry. If the takeover succeeds, antitrust concerns would likely prevent Mittal from going after other leading European steel makers. If it fails, however, the Anglo- Dutch firm Corus -- number three in Europe and the only active steel producer in the Netherlands -- might find itself on Mittal's shopping list. While much of the opposition to Mittal's bid for Arcelor is motivated by a fear of job losses, consolidation and cost-cutting may be the most effective way for Europe's steel industry to face the growing competitive challenge from China. END SUMMARY. ¶2. (SBU) As reported in the press and reftels, Mittal Steel, the world's largest steel company, launched an unsolicited bid to take over Luxembourg-based Arcelor, Europe's largest steel company. The following is a summary of Econoff's discussions with various industry and financial experts on the possible implications of such a move in the Netherlands. SEEKING COMPETITIVE ADVANTAGE THROUGH CONSOLIDATION -------------- -------------- ¶3. (SBU) Although Mittal Steel NV (87 percent owned by the Mittal family and run out of its London offices) is incorporated in the Netherlands, legally headquarted in Rotterdam, and traded on the Amsterdam and New York stock exchanges, the Anglo-Dutch concern Corus is the only active steel production facility in the Netherlands. While declining to comment directly on how Mittal's bid might affect her company's future strategy, Truus Valkering, Director of Communications and Public Affairs for Corus Steel, explained that consolidation in the steel sector is a logical response to consolidation in surrounding industries. Both companies that supply raw materials and companies that buy processed steel (e.g., the automotive industry) have increased their size and bargaining power. To sustain its competitive advantage in both directions, the steel industry also needs to consolidate. ¶4. (SBU) Charles Spencer, Steel Analyst for Morgan Stanley's London office, added that such a move could accelerate consolidation in the steel sector. As Corus would be better positioned within a larger group, such as the Mittal family, the deal might also stimulate Corus' management to defensive actions. Sander Stuijt, Vice President of Commodities for ABN AMRO (the Netherlands' largest bank) also expected continued consolidation in the steel sector. With the two main predators in the takeover market, Mittal and Arcelor, busy battling each other, Stuijt predicted that the remaining players in the market would seek a greater balance in bargaining power, which has continued to shift as Mittal has grown. 'BETTER THEM THAN US' -------------- ¶5. (SBU) Citing analyst reports, Marcel de Kleer, Portfolio Manager for Dutch investor Palladyne Asset Management, described Mittal's offer to buy Arcelor as potentially "transformational" for Mittal and the industry. Greater share liquidity, improved corporate governance and a higher dividend payout could increase investor confidence in the coming years. ¶6. (SBU) Gilles Calis, Managing Consultant of Amsterdam- based Steel Consult International, highlighted strategic market factors. A joining of Mittal and Arcelor would create a powerful new company (with nearly 10 percent of global steel production),operations close to Corus' home market (the Arcelor sites),and the added weight of the Mittal family conglomerate. Such a takeover would likely prevent other future takeovers, as further consolidation would conflict with EU competition policy. Other companies would clearly rather see Mittal take over Arcelor than their own operations. However, this strategic advantage could quickly become a disadvantage if the takeover failed, as Mittal's ambitions might then be directed at European steel companies numbers two and three: ThyssenKrupp and Corus. COMMENT - RESHAPING EUROPE'S STEEL SECTOR -------------- ¶7. (SBU) A successful takeover of Arcelor by Mittal would reshape the playing field in Europe's steel sector. It would create a dominant player in the European market, ending both companies' options to buy up other steel companies in the region. This could either leave Corus in a comfortable niche position, or drive it into the arms of ThyssenKrupp in search of further consolidation. But if Mittal's bid to buy Arcelor fails, Corus may well be its next prey. This would not likely affect Corus' state-of-the- art steel production in the Netherlands, but it could pose a serious threat to its less efficient UK operations. (The Corus operation in Wales has higher operating costs and lacks its own coke factory, which makes it dependent on imports of high-cost inputs.) ¶8. (SBU) The strong opposition to the Mittal takeover bid on Arcelor's home ground in Luxembourg, France, Belgium, and Spain partly stems from fears that rationalization of the merged firm would lead to significant job losses. But Corus execs have told us that they see their principal competitive challenge as coming from China's rapidly growing steel industry. This challenge will only intensify if a downturn in Chinese steel demand causes excess Chinese steel to be unloaded cheaply in other markets. Mittal's forced rationalization of Europe's steel industry could be the sector's best long-run hope for ensuring efficiency and price stability. BLAKEMAN