DUTCH VIEWS ON MITTAL'S TAKEOVER BID FOR ARCELOR

UNCLAS SECTION 01 OF 02 THE HAGUE 000253

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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'
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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
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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