ArcelorMittal steels itself for India haul

The global steel fraternity was taken by surprise late last week when ArcelorMittal, the world���s largest steel company by capacity, signed a co-promoter agreement with Mumbai-based Uttam Galva Steels, in a bid to bring to India the global player���s robust downstream operations in Europe. As in all transactions done by ArcelorMittal, the timing caught the industry off guard, coming as it did just days after an unrelated acquisition in the downstream steel space by Essar Steel. But more than the timing, the vast difference in size ��� Uttam Galva makes less than a million tonne of steel a year, compared to ArcelorMittal���s 103.3 million tonne ��� left the industry puzzled.

However, as it turns out, ArcelorMittal���s sights are trained on the expanding Indian consumer goods and automotive sectors (Uttam Galva���s galvanised steel is the main input for the sectors), besides ironing out ticklish raw material issues. Also, the move comes at a time when ArcelorMittal is grappling with production cuts at its profitable units. While demand for steel is growing at 3-5% in most parts of the world, in India it���s expected to grow by over 10%, thanks to the government���s efforts in building infrastructure.

In an exclusive conversation with ET NOW, ArcelorMittal group management board member and one of the longest-serving executives at the group, Sudhir Maheswari, outlines the rationale behind the move to team up with Uttam Galva.


A veteran of 18 years with the group, Mr Maheswari has held many roles within the group, including that of managing director at Mittal Steel, before it was renamed as ArcelorMittal. He was also chief financial officer of LNM Holdings from January 2002, until its merger with Ispat International in December 2004.

ArcelorMittal is essentially a primary steelmaker, so how do you see a secondary steel company like Uttam Galva strategically fitting into your business?

ArcelorMittal is of course the world���s largest primary steel maker but it also has a very strong downstream business activity as well. We are one of the largest downstream players in Europe and in many other parts of the world. So as far as Uttam Galva is concerned, it is very strategic and it is at the core of our strategy.

Why did you pick a secondary player when there could be a few primary players you could have looked at? Also, what is the biggest factor in Uttam Galva that prompted you to pick the company for co-partnership?

Uttam Galva is a very good company. We have been seeing the development of this company over the years principally as a supplier to them, as we have been large and regular supplier of hot-rolled coils to Uttam Galva from our various plants around the world. The progress that they have made has been very impressive, and India is a growing market with an expanding demand, especially of white goods and the automotive industry to which Uttam Galva supplies. We believe that we can enable a far more rapid development in their capabilities to supply to those sectors, and obviously we can also provide them with a much bigger reliability as far as raw material sourcing is concerned.

The offer price is at around Rs 120 per share. How did you reach this figure, in terms of valuations?

It is very difficult for us to talk about how we came at the value that we came at. The one thing that I can say is that this is a very attractive value. As you know, this is almost 85% premium over the 6-month average and even over the last two weeks average, it is at a premium of 27%. The share price of Uttam Galva in the last few weeks obviously had been appreciating and that is why you see this differential. But over a period of time, you can see this is a very attractive price. It values Uttam Galva very attractively and therefore, I think this is a very fair and compelling price.

You just told us about the kind of raw material synergies that Uttam Galva will derive. Can you just give us some specifics in terms of how both the companies will benefit?

From Uttam Galva���s point of view, they can have a reliable source of raw material. I think a lot of the qualities (in terms of raw materials) that we can supply to Uttam Galva are not necessarily made in India. Also, I think we can provide them with the know-how and technology, both in terms of how to consume that, how to perfect the production patterns around these high qualities. Of course for us, we are also aspiring to get closer to this consumption sector in India because we believe there is growth taking place in India.

What will the management structure look like with the Miglanis on board?

Well, the management structure of the group is that there is a co-promotion agreement agreed between the Miglani family and ArcelorMittal. Both are becoming co-promoters, so financially both are becoming equal partners. Therefore, the management structure and management practices will reflect the equal structure of the partnership. But we expect the Miglani family to continue playing a leading role in developing this company. They have years of experience in developing this company and we are very satisfied with how they have done, so we as ArcelorMittal would be available to assist wherever they need any assistance, be it in technology, know-how, raw material, management or capital. However, the driving force behind the continuous operations of the company will continue to be the Miglani family.

Does that mean that at no given point in future would you be looking at increasing your stake after picking up 29.4% via the open offer?

No, at this point in time, we are not looking at taking a majority stake in Uttam Galva.

And that is not something that the company would contemplate in future?

It is not in our current plans and obviously how things evolve is difficult to predict but it is not in our current plans to take over majority control over Uttam Galva now and in the near future.

We have already seen Uttam Galva locked in circuit, their stock is at Rs 125 up 10%, with some sense that the price could be revised upwards. Does Rs 120 stay and remain the open offer price?

Yeah, we have put forward what we believe is a very compelling and a very fair price and there are no plans to increase that price.

What are the plans for the Orissa project now that Uttam Galva is also planning to set up a plant there? Will it be a combined setup?

No, we have not really taken a view on that. We will discuss that with the Uttam Galva management in due course, but as far as ArcelorMittal is concerned, we have very firm plans to develop greenfield strategy in India and we are on track to do so. There is absolutely no turning back on our greenfield strategy in India.

Is this where your acquisition strategy stops? Or are you still looking at more such deals, especially with companies which are attractively evaluated in the Indian arena?

Well, quite frankly we are not aware of any more companies. In our understanding, India is not a market where M&A in the steel sector is easy or simple. So for us, this is a rare opportunity but apart from that we remain focused on our greenfield strategy.

Okay, as of now you are saying this is where your acquisition stops?

Well, as a company we do not comment on M&A strategy publicly. All I can say is generically it is not one of those markets where M&A is a very easy way to grow.