Lakshmi N. Mittal, the Indian-born steel tycoon, has built a $6.4 billion personal fortune on the scraps and remnants of aging steel companies from Algeria to Poland to Mexico. He also knows how to spend the enormous wealth that success has brought him. Last April, Mittal dropped $128 million on a 12-bedroom neo-classical mansion in London's fashionable Kensington. Two months later, he hosted 1,000 guests in and around Paris for his daughter's weeklong wedding celebration. The festivities included a formal bash at the Palace of Versailles and cost a rumored $50 million.
But what the 54-year-old Mittal really likes to spend his money on is buying more steel mills. In his biggest move yet, Mittal announced a deal that will create the world's largest steelmaker, with estimated annual revenue of $31.5 billion. The two-step transaction first unites Mittal's European companies -- Ispat International (IST) and LNM Holdings -- in a $13.3 billion merger. The new entity, Mittal Steel Co., will then acquire International Steel Group (ISG) in Richfield, Ohio, for $4.5 billion. By enlarging Mittal's U.S. holdings with ISG, Wilbur L. Ross Jr.'s collection of once-decrepit but now revamped U.S. steel factories, the transaction unites four of the seven largest old-line U.S. steelmakers that existed in 2001 -- LTV, Bethlehem Steel, Weirton Steel, and Ispat Inland Steel. Assuming the deal passes regulatory muster, as industry insiders expect, Mittal predicts the transaction will be completed by next April.
The move is almost certain to set off a new wave of global steel consolidation as competitors, such as Luxembourg's Arcelor and South Korea's Posco (PKX), seek to match the scale and clout of Mittal Steel. And that raises a key concern for U.S. manufacturers: whether the emergence of Mittal as a global steel powerbroker will limit their ability to bargain on price. For now, however, the big question is whether Mittal, which has been so successful at resurrecting aged steel mills in mostly developing and former Soviet bloc countries, will thrive in the far more competitive U.S. market.
Mittal has rarely made a misstep before. Like Ross, he's a big risk taker who has proven that new money can be made from an old industry. Shopping around the world whenever steel mills come on the market, Mittal has built a powerhouse that stretches from Europe to Africa and Latin America. He has been able to generate profits by using his scale to buy lower-cost raw materials and by importing modern management techniques into previously inefficient state-run mills.
Now, though, the bar is much higher. ISG's operations have already had huge costs wrung out by Ross. To buy them, Mittal paid $42 a share, a 42% premium. But Mittal argues this money is well spent because the consolidation will deliver better economies of scale. For example, the new company will own three mills clustered on Lake Michigan, making it easier to centralize management, consolidate material delivery, and optimize what each plant makes. Thanks to its size, the combined company will have access to larger, lower-cost supplies of ore, coke, and coal. "We already run the lowest-cost, highest profit mills in the U.S.," says Mittal. "ISG isn't there yet, but we can get them there."
Mittal Steel's rise opens a new chapter in the industry's consolidation. Till now, the game has been mostly regional -- with U.S. and European players tending to merge in their respective markets. Mittal's move globalizes this trend. The world's top producers have little choice but to bulk up to match Mittal Steel's post-merger output of 57 million metric tons. That dwarfs the output of the No 2. and No. 3 players: Luxembourg's Arcelor is on track to pour 43 million metric tons, and South Korea's Posco is likely to produce 30.5 million metric tons. Plus, neither has a substantial presence in the U.S. "They'll have to look overseas to match [Mittal Steel's] global reach," says Michael Locker, president of consultants Locker Associates Inc.
The shakeup spells uncertainty for the remaining U.S. producers. With annual output of around 20 million metric tons each, U.S. Steel and Nucor are big fish at home. But globally, their production levels put them in a second tier with only minor international presence. If they don't grow quickly, they risk being taken over, most likely by foreign makers seeking a U.S. footprint. Within five years, predicts Locker, the highly fragmented world steel market will be dominated by six or so "super producers." Today, only Mittal Steel has entered that league.
Fewer steel sources also means higher prices are likely. That's bad news for buyers, who have seen prices climb steadily since 2003. Analysts expect that carmakers will have to pony up 20% more for new steel contracts running through next year. That would increase the average cost to produce a vehicle by $174, according to UBS Securities. Ispat, Mittal's existing U.S. unit, already has a hard-nosed reputation. The company recently hiked rates to Whirlpool Corp. (WHR) causing the appliance maker to boost its prices by as much as 10% in September. Says Chairman and CEO Jeff M. Fettig: "I don't think any company can overcome that magnitude of raw-material price increases with productivity."
If Whirlpool's experience with Mittal is an indication of what's to come, the tycoon from India will have plenty more cash to spend on lavish parties -- and U.S. manufacturers may have one more problem to worry about.
By Adam Aston in New York and Michael Arndt in Chicago, with Manjeet Kripalani in Bombay and Laura Cohn in London