Meet the New Owners: The Billionaire Mittals

© by Mark Reutter

Lakshmi Niwas Mittal, mastermind of the Mittal family empire and new owner of Sparrows Point, has managed to move up from ownership of a single steel plant in Calcutta in 1976 to become the single largest owner of steel properties on the globe, valued at $30 billion.

Lakshmi Mittal, the new owner of Sparrows Point, recently purchased this house in London for a record price of $105 million.

Reportedly the richest Indian and a “Forbes 100 Billionaire,” Mittal, 48, paraded his gilded status last year by staging a $55-million wedding for his daughter at the Palace of Versailles, once the home of Louis XIV, France’s Sun King.

His ticket to extraordinary wealth? The same strategic control of steelmaking that earlier forged the fortunes of Andrew Carnegie, Charles M. Schwab, J. P. Morgan, and John D. Rockefeller, plus scores of lesser luminaries, not excluding America’s first “million-dollar-bonus” executive, Bethlehem Steel’s own Eugene Grace.

Mittal (who does not discourage westerners from pronouncing his name “me-tal,” as in “The Metal King”) accomplished his alchemy by scooping up “distressed” mills in obscure corners of the world and turning them around through tough management practices.

In other words, a financial playbook of extracting “value” through vulnerability and hard bargaining not dissimilar to the gospel of Wilbur Ross. “His policy is very simple; he does not touch a plant he can’t turn around in two years,” noted an Indian business service, CareerMosaicIndia.com, in an article titled, “L. N. Mittal — Steel-ing the Show!!”

His quest to become the greatest steel tycoon in history hasn’t been hurt by his political connections in his adopted land of Britain or by the West’s economic policies that place a premium on privatization and make it easy for clever businessmen to transmute leaden public-sector assets into private gold.

Born in Safalpur, India, Mittal moved to Calcutta when his father bought a small steel mill. Between preparing for his accountancy exams at St. Xavier’s College in the 1970s, Mittal worked at his father’s company, which he inherited. In Calcutta he also met his wife, Usha, the daughter of a moneylender, who would become a key adviser to the nascent tycoon.

Reversing the direction of the recent tsunami waves, Mittal reached across the Bay of Bengal in 1976 to purchase a failing company in Indonesia that made rod and wire. While technologically “old hat,” the mill possessed a key ingredient of cheap steelmaking — a workforce as low-cost and pliable as the Eastern European immigrants and black Americans who labored on 12-hour-a-day, seven-day-a-week shifts at Sparrows Point a century ago.

The Indonesian mill became enormously profitable, or at least was viewed as such, and the Mittals used the company as their launching pad for warp-speed expansion. Moving to London, the couple started to snap up steel mills as far removed as Trinidad, Ireland, Tobago, Algeria, and South Africa.

The worldwide move toward privatization provided the political and economic context for their plans. The Mittals often demanded tax breaks from local authorities and international aid from western development agencies as part of their conditions to turn “sick” state-owned steel mills into “entrepreneurial” western-style outfits.

Former Soviet-bloc governments obliged; for one thing, the governments were eager to sell their steel assets in order to gain admission to the European Union. For another, the big state sell-offs created a large flow of money that left well-placed individuals and institutions salivating.

One of the first examples of Mittal’s successful foray outside of Asia was his 1995 purchase of the giant steel plant in Kazakhstan. A product of Soviet state planning, the pollution-filled behemoth had the advantage of being close to raw materials and low-wage labor, and soon it poured out profits by supplying steel to China.

In 2001, Mittal made a £125,000 (about $235,000) contribution to the British Labor Party. A month later, Labor Party chief and UK Prime Minister Tony Blair interceded on Mittal’s behalf to help him secure the purchase of Romania’s state-owned steel works. Blair’s personal letter to the Romanian Prime Minister argued that Mittal’s bid could help Romania gain EU membership.

The Romanian press reported that Mittal personally met with Privatization Minister Ovidiu Musetescu and presented a letter of bank guarantees worth $47 million as the first step in purchasing the majority of shares in the Sidex Steel Works. It has since come to light that the Blair government supported international loans worth hundreds of millions of dollars to assist Mittal’s growing chain of steel mills.

The Sidex Works were purchased by Ispat International NV, a Rotterdam-based company. Ispat, which means steel in Sanskrit, became the Mittals’ financial vehicle-of-choice to purchase European and U.S. steel mills in recent years. (A private company owned by the family, LNM Holdings NV, held many of its Asian and third-world mills.)

Ispat was taken public in 1997 and traded on the Amsterdam and New York stock exchanges. Backed by investor cash, the Mittal-controlled company made its first foray into American steel in 1998 by acquiring Inland Steel, the sixth largest U.S. steelmaker.

By 2004, the Ispat/LNM empire spanned four continents and included steel works in 14 countries. Among them, Sidbec and Acufil (Canada); Hamburger Stadtwerk, Stadtwerk Ruhr, and Walzdraht Hochfeld (Germany); Unimetal, Trefileurope, and SMR (France); Ispat Shipping (UK); Polska Stal and Czestochowa (Poland); Nova Hut (Czech Republic); Annaba (Algeria); Caribbean Ispat (Trinidad); Ispat Mexicana (Mexico); Ispat Indo (Indonesia), Ispat Petrotub, Ispat Siderurgica, and Ispat Tepro (Romania); BH Steel and Zenica (Bosnia Herzegovina); and Ispat Iscor (a partnership in South Africa).

In 2005, the Mittals have their eyes fixed on Turkey’s largest steelmaking plant, Erdemir, which the government plans to privatize, and in January 2005 Mittal Steel announced the purchase of a 37 percent share of China’s Hunan Valin Steel Group.
Not so successful was the family’s investment in an Irish steel plant. The mill was shut in 2001, causing bitter and lingering anger among the workforce.

With 88 percent of Rotterdam-based Mittal Steel to be owned by the Mittal family, there will be little room for non-family stockholders to have much say in the company. Or knowledge. There is little “transparency” in this company, with headquarters in loosely regulated Netherlands, ownership in Britain, physical plants tucked around the world, and family assets reportedly stashed in the Dutch Antilles. Seeing the real Mittal Steel is about as easy as glimpsing through the clouds of smoke at the Kazakhstan mill.

And that’s the way the Mittals want things to be: A family affair. Lakshmi will serve as chairman and CEO of the conglomerate; son Aditya, 28, will be president and chief financial officer; and newly wed Vanisha, 23, will join her father and brother on the board of directors of mostly Indian family cronies (plus Wilbur Ross). Holding both an MBA degree from Wharton School of Finance and having worked for his dad, Aditya insists that he is supremely equipped to manage the company. We are reassured of Aditya’s not-just-competence-but-brilliance by the public statements of Wilbur Ross.

The emergence of Lakshmi Mittal marks the fourth time in U.S. history that a single businessman has become the kingpin of American steel. Andrew Carnegie wielded de-facto market dominance in the late 1890s. The consolidation of Carnegie and other properties into U.S. Steel Corp. led to Carnegie’s retirement in 1901 and the emergence of financier J. P. Morgan as the controlling presence of the industry. The third era of single-party rule was the 1920s heyday of Bethlehem Steel Chairman Charles Schwab before the Depression and personal excess wiped out much of his net worth. (See the chapters “Chasing Dollars,” “Smash-Up,” and “End of an Era” in MAKING STEEL for more.)

Mittal will be the first non-U.S. citizen to exert such marketplace clout. With the Bush administration’s Justice Department voicing no objection to his purchase of ISG, Mittal Steel will assume ownership this year of four of the five major steel plants on the Great Lakes (former LTV Chicago, former Inland East Chicago, former Bethlehem Burns Harbor, and former LTV Cleveland).

More importantly, Mittal Steel will own 40 percent of domestic production of flat-rolled steel — the most common material used in automobiles and appliances and the last major steel market free of competition from mini mills. Referring to Ford and General Motors, the Wall Street Journal reported that “the emergence of London’s Mittal family as a significant force in the U.S. steel market will diminish their bargaining power and put further pressure on their efforts to control costs.” Additionally, Mittal Steel will dominate U.S. tin-plate production once it completes acquisition of former ISG facilities at Sparrows Point and Weirton, W.Va.

The “industry analysts” that the media so likes to quote are typically sanguine about Mittal’s consolidation of U.S. steel properties. Their mantra that steel needs to consolidate, globalize, and extract “synergies” to become an efficient industry is rarely questioned by government officials or the press. Fortune magazine, for example, named Mittal “businessman of the year in Europe” in January 2005 for his ability to “combine managerial savvy with superb acquisitive instincts.”

But is Lakshmi Mittal really so “savvy” outside of his undeniable genius at collecting the cash flow of hundreds of scattered steel mills? The vast majority of Mittal mills are scarcely high tech or even middling tech. They are ex-government operations with little vertical integration or institutional interconnection (a.k.a., synergy).

The key to the Mittals’ success is not cutting-edge global steelmaking, but their mastery of churning out tons of low-grade steel to captive local markets. From Trinidad to Tobago, the Mittal family sought out established or state-built properties that were undergoing economic or political upheaval. Many of the regions were desperately in need of steel after years of war or infrastructure decay, and the Mittals astutely tapped into the deep pockets of the international community in the name of privatizing and modernizing overwhelmingly poor countries.

The question raised at the end of MAKING STEEL regarding the brief reign of King Ross remains: Whether Sparrows Point and other U.S. steel mills have a future based on progressive technology and adequate investment, or whether the mills and their workforces have been yoked yet again to financial sharpies seeking to squeeze more toothpaste out of the tube.

The doubling of steel prices in 2004, thanks to China’s heavy demand for steel, makes any mill that can smelt hot metal profitable at the moment. But what will happen when the inevitable downturn takes place?

The Mittals’ ability to control key captive markets in the United States will offer them short-term insulation. Over time, however, will alternative products and mini-mill competition put the dynasty under strain? Or will Lakshmi and Usha Mittal buckle down and develop new markets and technologies for steel under the direction of Aditya and Vanisha? The lack of transparency and insider domination of Mittal Steel make any predictions of the company’s long-term future speculative at best.
In the past year, the British press has discovered quite a bit about the lifestyle and family values of “Tony Blair’s favorite Indian businessman.” Last year, Lakshmi purchased the most expensive house in London at £57 million ($105 million), which pivoted him into the realm of the overachieving nouveau riche.

But that was nothing compared to the details that emerged from the July wedding of daughter Vanisha to Amit Bhatia, a 25-year-old London financier. The press lavished attention about how the family hired the palace of Versailles and filled its gardens and halls with thousands of guests and Bollywood notables. Fireworks filled the skies and pop star Kylie Minogue entertained the throngs with a special performance. Contrasting the lavish doings at the palace with the lives of the workers laid off at Mittal’s Irish mill, a London newspaper headlined its story: “OBSCENE.”

A month later, when Ispat Inland stopped paying benefits to about 2,000 widows of deceased U.S. steelworkers, employees took action. One woman in a wheelchair held a picket sign that read, “MITTAL STARVES WIDOWS.” The media was present, and the company reinstated the widows’ benefit.

Some investors of Ispat have recently questioned the relationship between the Mittals' private and public companies, especially the $2-billion dividend paid last year by the private LNH Holding to the senior Mittal prior to its sale to the public Ispat. The investors say the family promised in a filing with the Security and Exchange Commission that they would only make acquisitions through the public company.

Whether the SEC will examine the rationale for Mittal’s dividend from his family’s company before it merged with the public company (thereby diluting shareholder worth of the new company) is not known. Lakshmi Mittal has expressed confidence that his $2-billion dividend was not only legitimate but richly deserved. “As a private company, we have been paying dividends before and we will pay dividends now,” he told the Wall Street Journal (Oct. 28, 2004).