Dragging steel into the global era

Global Finance, May 1998 by Lanchner, David

In an era of global industries, steel production has remained stubbornly nationalistic: Countries have long prided themselves on self-sufficiency in steelmaking, and only some 5% of world steel production is exported to other markets. But a hard-driving Indian entrepre neur named Lakshmi N. Mittal is fast changing that. In the face of a worldwide steel slump, Mittal in the past decade has built a network of steelmakers in seven countries. And in March he pulled off his most dramatic coup yet: a deal to buy Inland Steel, America's sixthlargest producer, for $1.43 billion. Mittal's US invasion has people calling him "the Andrew Carnegie of globalization"-in honor of the American mogul who consolidated US steel mills a century ago.

Mittal, 47, already exhibits Camegieesque style: He has amassed a personal fortune of $2.5 billion and resides in London's Hampstead in a $10 million mansion called the Summer Palace. His main operating company, Ispat International (held through his London holding company LNM Group), will pay $888.2 million in cash and assume $538.6 million in debt to acquire Inland from its holding company parent, Inland Steel Industries, which is fleeing the business and will probably change its name (its chief remaining interest is 87% of Ryerson Tull, a metals processor and distributor). Mittal negotiated the deal in a mere 10 days, a pace so swift that Credit Suisse First Boston, his adviser on the deal, and Inland's adviser, Goldman Sachs, had little to do but tag along.

Mittal left his father's small steel business in India in 1976 to build an Indonesian mill, whose production he subsequently expanded eight-fold. Near the end of the 1980s he embarked on his global strategy, buying up state-owned, moneylosing mills in Trinidad, Mexico, Germany, Ireland, Canada, and Kazakstan-often at 15-20% of what it would cost to build that capacity anew. Says one London steel trader who used to sneer at Mittal but now takes him seriously: "He's incredibly bold. That's his trademark-taking on things no one else would touch with a barge pole." Ispat now exports 53% of its production and sells in 63 countries. Last year it earned $186 million on revenues of $4 billion. With the acquisition of Inland, which had operating income of $144.4 million last year on $2.47 billion in sales, LNM Group will leap from 1I th to fourth among the world's largest steel producers.

Ispat's global reach is bad news for rivals. "They've got established distribution routes throughout the world, allowing them to export steel to wherever it brings the highest price," says Robert Garvey, chief executive of Alabama's Birmingham Steel. Most worisome, he adds, is that "with Inland they can send inexpensive feed stock from their lowcost labor facilities in Mexico and Trinidad." In global terms, says Allen Coates, Merrill Lynch's steel analyst in London, the only company similar to Ispat is Luxembourg's Arbed. But unlike Mittal, Arbed has paid high prices for its overseas deals, Coates says, which has "restrained profits and hiked debt levels significantly."

Mittal should have no trouble paying for Inland: He took Ispat public in a $776 million IPO last August. But for the first time, he's paying close to market value-about five times cash flow. And there are other signs that the era of bargains is over. When Venezuela auctioned its stateowned steelmaker, Sidor, in December, a South American consortium won the furious bidding with $2.3 billion-more than 50% above the asking price. Mittal, noticeably, dropped out of the bidding long before that. -David Lanchner