Dec. 19 (Bloomberg) -- Nippon Steel Corp., the world's second-biggest steelmaker, and two Japanese rivals will spend 260 billion yen ($2.3 billion) buying stakes in each other to bolster takeover defenses and strengthen a production alliance.

The purchases will roughly double the amount of cross- shareholdings that Nippon Steel, Sumitomo Metal Industries Ltd. and Kobe Steel Ltd. have in each other, the companies said in a joint statement to the Tokyo Stock Exchange today.

A five-year rally in commodities prices spurred takeovers in the mining and steel industry, including Mittal Steel Co's $38 billion purchase of Arcelor SA last year. Nippon Steel President Akio Mimura in July said the company wants to bolster defenses by raising output and through cross-shareholdings, as ArcelorMittal stated ambitions to grow in Asia.

``They do it because it gives them an extra cushion against the possibility of a takeover bid,'' Yuuki Sakurai, general manager of financial and investment planning at Fukoku Mutual Life Insurance Co., which manages the equivalent of $41.5 billion in assets, said by phone in Tokyo. ``This is not a very effective investment, even the company's board members know it isn't. It's like a very expensive lucky charm.''

Nippon Steel gained 0.2 percent to close at 617 yen on the Tokyo Stock Exchange. Sumitomo Metal Industries fell 0.4 percent to 449 yen and Kobe Steel dropped 0.6 percent to 340 yen, compared with a 1.2 percent decline of the benchmark Nikkei 225 Stock Average.

Anytime

``Takeovers will happen anytime in the global steel industries,'' Kiichiro Masuda, the vice president of Nippon Steel, said at a press conference today. ``This additional crossholdings will eventually have the impact of increasing stability of shareholdings and act as a protection against takeovers.''

ArcelorMittal, the world's largest steelmaker, this month agreed to take over China Oriental Group Co. for at least HK$18.6 billion ($2.4 billion) to expand in China. BHP Billiton Ltd., the world's largest mining company, wants to buy rival Rio Tinto Group, which would make it the largest supplier of iron ore in Asia.

The value of takeover offers in the mining and steel industry globally exceeded $238 billion this year, following on $273 billion the previous year, according to Bloomberg data.

Sharing Expertise

The three Japanese steelmakers on Oct. 30 unveiled a plan to cut costs by sharing expertise and plants, including Sumitomo Metal Industries' 90 billion yen ($785 million) capacity expansion at its Wakayama mill, southwest of Osaka.

The alliance with Sumitomo Metal Industries will probably add about 50 billion yen to Nippon Steel's annual pretax profit from 2012 when the expansion is completed, Masuda said today.

Nippon Steel and Kobe supply hot-rolled coil steel to Sumitomo Metal Industries. The steelmakers have previously also said they may combine Nippon Steel's hot-rolling capacity with Sumitomo Metals Industries' downstream rolling at its Naoetsu facility to process nickel-based stainless steel slabs from the Wakayama Steel Works.

``To share core facilities, we need to show our mutual trust by additional cross-shareholdings,'' Masuda said.

Nippon Steel will raise its holdings in Sumitomo Metal, Japan's third-largest steelmaker, to 9.4 percent, from 5.01 percent. It will also raise its stake in Kobe Steel to 3.4 percent, taking its total spending to 115 billion yen.

Sumitomo Metal Industries will spend 115 billion yen to expand its holdings in Nippon Steel to 4.1 percent, and in Kobe Steel to 3.4 percent. Kobe Steel will spend 30 billion yen to raise its Nippon Steel holdings to 0.8 percent and its share of Sumitomo Metal Industries to 2.4 percent.

The companies will buy the shares on the market, and will complete the purchases by the end of March, the companies said.

To contact the reporters for this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net; Yoshifumi Takemoto in Tokyo at ytakemoto@bloomberg.net

Last Updated: December 19, 2007 03:53 EST