MOSCOW. (RIA Novosti economic commentator Vasily Zubkov)
Arcelor, the world's No. 2 steel company headquartered in Luxembourg, and Severstal, the largest Russian steelmaker (Cherepovets, NE European Russia), have announced a merger.
This is breaking news - the transaction will create the world's steel champion and the most profitable steel company with annual turnover of 46 billion euros and an output of 70 million tons (6% of the world's total, whereas today Russia's share on the global steel market is 5.2%, or 60 million tons).
What will the two companies gain from this merger? The rumor that Arcelor agreed to merge with Severstal because of a threat of an unfriendly takeover by Mittal Steel, the global leader on the steel market that belongs to the family of Indian-born billionaire Lakshmi Mittal, does not sound plausible.
Severstal principal shareholder Alexei Mordashov, 40, said the talks with Arcelor had been launched four years ago, which implies a mutual interest.
Like Arcelor, Severstal turns out automobile body sheet, which is a VAT product (the combined company will account for 22% of its global production), and large-diameter steel pipes. Secondly, Severstal has low costs and a high quality output.
Arcelor is also satisfied with Severstal's foreign assets, notably Italian Lucchini and Severstal North America.
Under the deal, Mordashov will swap his stake in the two companies, as well as his 89.6% stake in Severstal and will also pay 1.25 billion euros in cash for an additional issue of Arcelor shares. As a result, he will have a 32% stake in the merged group, the post of board chairman and the right to appoint six of the 18-member board.
The deal, worth 13 billion euros, has set a record on the Russian market. Arcelor will use its new partner to gain broad access to a promising market. Russia's economic development rates have been high for the past few years, and major pipeline projects that are being launched in East Siberia and the Russian Far East should guarantee demand for the merged company's output for many years to come.
Severstal's Cherepovets plant will have an additional chance to get a foothold on the restricted European markets, primarily the markets of automobile body sheet. At present, 85% of Severstal's output is delivered to the Russian market.
The merger should also benefit the company's $1-billion investment program in modernization, because Arcelor has modern technologies and know-how.
The two companies are partners of long standing. They have an agreement on technical support and exchange of technologies, which stipulates regular meetings of their specialists, as well as joint projects.
In 2004, Severstal-Metiz, a leading Russian wire manufacturer, bought a plant from Arcelor for the production of shot-fired nails.
In 2005, Arcelor and Severstal set up the TA Cord joint venture, producing metal cord.
Four years ago, they set up a Severgal joint venture (in which Arcelor owns 25%) in Cherepovets, a galvanizing line for the Russian automotive market with the annual capacity of 400,000 tons. The project's budget, including spending on the acquisition of equipment, construction, personnel training, and marketing campaigns, is assessed at $170 million. Severgal was commissioned in April 2006.
The above factors, as well as Arcelor's ambition to open up new development vistas (in part for the repayment of the recent 5-million euro loan) show that the two countries seriously pondered their merger, which the threats of Mittal Steel have catalyzed.
What are the political aspects of the deal? For the first time ever, a Russian company will become the owner of one-third of the world's number one steel giant. This certainly needs the approval of the country's authorities.
Two weeks ago, Mordashov visited President Vladimir Putin in his Sochi residence on the Black Sea. Although the official subject of their meeting was the participation of big Russian business in the priority national projects, notably in education, they are certain to have discussed the forthcoming merger. It appears that Putin has approved it.
The Federal Antimonopoly Service of Russia is aware of the merger, and one of its top officials has voiced his satisfaction on the issue.
In other words, Severstal's actions coincide with the state policy, which supports the advance of Russian business abroad.
The West often says Russia is unwilling to allow foreigners into its key sectors, but such major deals as the Arcelor-Severstal merger and the Russian British TNK-BP joint venture disprove this claim. They are the best possible advertisement for new Russia and its ambition to become an equal player on the global market. Moreover, it is proof of the growing investment attractiveness of the Russian economy.
Finance Minister Alexei Kudrin, who is also pleased with the merger, said Russia was advancing to global markets, and the government welcomed business's efforts to find good foreign partners. The minister said the Arcelor-Severstal merger would have a positive effect on the Russian and global economies and was a sign of global trust in Russia.
