International Steel Group is about to become truly international.

Less than 18 months after ISG acquired the bankrupt Bethlehem Steel Corporation—the largest but not the only failed steelmaker to come under ISG ownership since its creation in 2002—ISG itself is on the block, after signing a definitive merger agreement with Ispat International N.V.

In a complicated deal involving two separate acquisitions, Ispat International has announced its purchase of LNM Holdings N.V. and the formation of Mittal Steel Company N.V. Mittal Steel, in turn, will merge with ISG in a transaction valued at approximately $4.5 billion.

Ispat International—which is based in Rotterdam, The Netherlands, and owns Ispat Inland at Indiana Harbor in East Chicago—is the publicly owned member of The LNM Group, the world’s second largest steelmaker. Ispat International operates in six countries in North America and Western Europe and has an annual production capacity of 19 million tons.

LNM Holdings—which is based in the Dutch Antilles—is the privately owned member of The LNM Group, held by Lakshmi Mittal, who also is chairman of The LNM Group. LNM Holdings operates in eight countries in Europe, Africa, and Asia and has an annual production capacity of 32 million tons.

The LNM Group itself is the second largest steelmaker in the world, estimated revenues last year of $12 billion, and approximately 120,00 employees around the globe.

ISG, on the other hand, was created by WL Ross & Company, a New York firm specializing in buyouts, specifically to acquire from liquidation the assets of LTV Steel Corporation. It did so in April 2002, for $135.8 million in cash and $54 million liabilities. In October 2002 ISG also acquired from liquidation the assets of Acme Steel Corporation, for $60.9 million in cash and unspecified liabilities. Then, on May 7, 2003, ISG went for the stands when it acquired Bethlehem from Chapter 11 bankruptcy protection, for $836.2 million in cash, $15 million in common stock, a set-aside of $125 million for “transition assistance,” and unspecified liabilities. In addition, ISG this year acquired Weirton Steel Corporation for $253 million in cash and liabilities and Georgetown Steel Company for $18 million and liabilities.

In short, in only two years, ISG became—by a hair—the largest steelmaker in the U.S., with an annual capacity of 22 million tons, a shade more than U.S. Steel Corporation’s annual domestic capacity of 19.4 million tons and approaching U.S. Steel’s worldwide capacity of 26.8 million tons.

In December 2003 ISG raised $462 million in an initial public offering and raised a further $69.3 million when the underwriters of the IPO exercised their over-allotment option and purchased an additional 2,475,000 shares of common stock at the IPO offering price of $28 per share.

Those shareholders would do well under the proposed deal, receiving $21 per share in cash and a number of Mittal Steel shares equal to $21 divided by the average closing price of Mittal Steel for the 20 trading days prior to closing, with a maximum of 0.6087 shares and a minimum of 0.4793 shares. The transaction would thus be valued at $42 per ISG share, or $4.5 billion in the aggregate if the price of a Mittal Steel share averages between $34.50 and $43.81 in those 20 trading days.

On Friday Ispat International closed at $25.34 and ISG at $29.68.

On completion of both transactions—Mattel Steel’s merger with ISG is expected to close by the end of the first quarter next year—Mattel Steel would have operations in 14 countries on four continents and 165,000 employees.

“These transactions dramatically change the landscape of the global steel industry,” Mittal said in a statement released this morning. “We are bring together Ispat International, LNM Holdings, and ISG, one of the largest integrated steel producers in North America, creating a global powerhouse. In recent years, the steel industry has been characterized by predominantly regional consolidation. This combination represents a significant step forward in the globalization of the industry.”

“The combined company,” Mittal added, “will have excellent positions in raw materials, particularly coal, coke, and iron ore, as well as strong positions in key end sectors. This combination also provides Mittal Steel with a more significant presence in important industrialized economies such as those in North America and Europe and in economies that are expected to experience above average growth in steel consumption, including Asia and Africa.”

“This transaction achieves all of our financial and business objectives,” ISG Chair Wilbur Ross said. “It provides our shareholders with an excellent rate of return and the potential for strong future appreciation. It accelerates by several years our strategy to become a leading global steelmaker. By joining with Mittal Steel, respected in the global steel industry for both its strategic vision and operational excellence, we have provided our shareholders immediate value, as well as participation in a new, financially strong, profitable global enterprise with excellent growth prospects.”

Mittal would become chair and CEO of Mittal Steel. ISG Chair Wilbur Ross would become a member of Mittal Steel’s Board of Directors. ISG President and CEO Rodney Mott would become head of Mittal’s combined U.S. operations and assume the title of CEO of Mittal ISG.

How exactly Mittal Steel ownership would impact ISG’s holdings—especially its local holdings—is unclear. “We honestly can’t say,” ISG spokesman Charles Glazer told the Chesterton Tribune. “We’re going to put together a strategic integration committee from all parts of our company and all parts of their company . . . and look for ways to leverage this as successfully as possible.”

Glazer did say, however, that Northwest Indiana would become one of Mattel’s “biggest concentrations.”

Although, Glazer noted, “a lot of folks were surprised on the world scene” by news of the merger, he suggested that perhaps they shouldn’t be. “This is a result of success,” Glazer said. “ISG had done a great job of turning around the assets of the bankrupt corporations. . . . It’s a nice strategic mesh of both companies, born of great industrial logic. . . . It just makes sense.”

It does make sense, Paul Gipson, president of Local 6787 of the United Steelworkers of America, told the Tribune. “It is positive for us and for the steel industry.” Gipson noted that the combined resources of Mittal Steel would go far to insure a ready and steady supply of raw materials which—with the spike in consumption most notably in China—have been hard and costly to come by: iron ore, coal, coke, and limestone. “We’re certainly going to be able to get plenty of it and at the right price.”

Gipson also remarked that the union’s position has long been that the problem in the steel industry is not too much capacity but too many companies. “We need to consolidate,” he said. “This merger is a tremendous consolidation.”

The USWA contract, he added, would remain the same under Mattel Steel ownership and profit-sharing would not be affected. As far as profit-sharing for the third quarter goes, Gipson said, ISG will pay members $5.326 per hour x 40 hours per week x 13 weeks in the quarter.

U.S. Steel spokesman John Armstrong declined comment today. “It’s premature for us to comment on the proposed merger or its potential effect on the steel industry,” he said.

Posted 10/25/2004