Will No. 4 be a keeper?

Mittal Rival Wins Trustee Approval to Buy Sparrows Point

© by Mark Reutter
Posted 3/21/08

Ownership of Sparrows Point is slated to pass to Alexei Mordashov (above) under a deal that was forced upon Lakshmi Mittal.

UPDATE (May 7, 2008) – Severstal completed its acquisition of Sparrows Point today and will begin hiring as many as 500 new employees, both to replace retiring workers and to ramp up production that was often curtailed by ArcelorMittal when orders did not meet profit margins and other measures.

Talk about a bitter pill to swallow: Lakshmi Mittal is selling Sparrows Point to Alexei Mordashov, billionaire CEO of Russian steelmaker Severstal, at a steep markdown.

Two years ago, Mittal famously outmaneuvered Mordashov to win control of Arcelor Steel. Ironically enough, that merger led to an anti-trust decree that today forced Mittal to sell Sparrows Point to his rival.

Severstal announced the purchase on its website, saying that Joseph G. Krauss, divestiture trustee for the U.S. Department of Justice, agreed to a purchase price of $810 million. Last December, a 40 percent higher bid ($1.35 billion) was scrapped when the Bouchard brothers of Chicago failed to secure financing. The weak U.S. dollar means an even bigger bargain for Mordashov and less value for Mittal, who largely trades in euros.

Of course, the Severstal deal could still unravel in today’s markets. But given that the purchase will be in cash and has won the acceptance of the United Steelworkers of America as well as Trustee Krauss, Severstal is likely to become the fourth owner of “the Point” in five years.

In May 2003, International Steel Group purchased the plant from bankrupt Bethlehem Steel Corp. Eighteen months later, ISG sold itself to Lakshmi Mittal, who then folded the former Bethlehem mills into his incubating global conglomerate.

In today’s announcement, Mordashov pledged to undertake a five-year investment program at the Point. “This acquisition presents us with an opportunity to enhance productivity at Sparrows Point through our high standards of operational performance and will benefit out existing U.S. businesses,” he said, adding more broadly, “We remain committed to growth in North America and believe in the long-term promise of the U.S. market.” 

Exactly how much capital Severstal will spend, or whether new employment will result, was not specified. Still, the CEO’s pledge is in counterpoint to Mittal’s consistent failure to invest at Sparrows Point. Shutdown of the mill’s “L” blast furnace, widely feared under Mittal, would cripple the plant and invariably lead to layoffs. Currently 2,400 people work at the Point.

Mordashov, 42, has emerged as one of Mittal’s most aggressive rivals. Son of a Russian steelworker, he won control of the Cherepovets Iron and Steel Complex in 1997 following privatization and used his connections with Kremlin officials and reliance on new technology to build his company into a player in world markets.

Most notably, Severstal supplies large-diameter and corrosion-resistant pipe for the booming Russian oil and gas industries and is a major producer of automotive steel. Mordashov also folded coal mines, media outlets, and other assets into the company, making Western analysts scratch their heads over its opaque financials.

Simultaneous to the expansion of his company was the growth of his personal fortune. Now listed as the world’s 18th richest person by Forbes magazine, with a reported net worth of $21.2 billion, Mordashov moved into American markets in 2004 with the acquisition of Rouge Steel, the fabled plant developed by Henry Ford to supply steel to his auto company. Spun off by Ford in 1989, Rouge filed for Chapter 11 bankruptcy in 2003.

Severstal has been credited with a successful turnaround of the plant, although Rouge’s financial performance in 2007 was hobbled by a costly relining of its blast furnace. More recently, Severstal opened a mini-mill operation in Columbus, MS.

Following Lakshmi Mittal’s hostile bid for Arcelor in 2006, Mordashov was brought into the bidding war by Arcelor executives as a “white knight.” His bid failed after Mittal secured the backing of political figures and hedge funds. But Mittal’s victory led to the court decree allowing Mordashov to bid for the biggest (and only remaining) integrated steel plant in the eastern U.S.

Governance questions continue to dog Severstal, which is now listed on the London Stock Exchange. Mordashov maintains a low profile in his private life and approaches business more like an engineer than a flashy dealmaker. He is reputed to have a close relationship with Vladimir Putin and has been accused of serving Putin’s agenda of suppressing dissent and free speech in Russia.

So far, U.S. lawmakers have expressed little concern that so many steel assets have fallen into the hands of foreign companies, led by Arcelor-Mittal, which owns four of six integrated complexes on the Great Lakes. (They are ex-Inland Steel’s East Chicago, IN., plant; ex-Bethlehem Steel’s Burns Harbor, IN., plant; and ex-Republic Steel’s Indiana Harbor, IN., and Cleveland plants. The non-Mittal-owned plants are Sevestal’s Rouge plant and U.S. Steel’s Gary, IN., plant).

Speculation about who might end up purchasing Sparrows Point has been a parlor game over the last few months, with reports surfacing that AK Steel of Middletown, Ohio, and ThyssenKrupp of Germany, might submit bids. It is not known how many bids were received by Trustee Krauss before he made his decision.

With a capacity to produce 3.6 million tons of raw steel yearly, Sparrows Point would more than double Severstal’s North American production and might begin supplying slab steel to the Rouge plant in Dearborn, Mich.