109-006-1

Arcelor Mittal Takeover

02/2009-5471

This case was written by Theo Vermaelen, Professor of Finance, with research assistance provided by David
Andrade, Brattle Group Senior Associate, as a basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
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109-006-1

On 24 January 2006, Guy Doll, president of Arcelors board of directors and CEO of the
company, had reason to be pleased. Two months earlier Arcelor had made a hostile bid for
Dofasco, a Canadian steel company. Although Dofasco had tried to fight the bid by
negotiating a friendly deal with white knight ThyssenKrupp, they eventually agreed to the
takeover on 24 January. The final offer price was C$71 per share, approximately 25% above
the initial bid (C$56) made on 23 November 2005. The C$5.6 billion acquisition cost would
be paid with cash.
The acquisition was part of Guy Dolls consolidation strategy. He believed that
fragmentation of the industry led to overproduction when prices rose, making it impossible to
have sustainable long-term profitability. Consolidation would generate a profitable
oligopolistic industry, rather than a cyclical industry with large busts followed by large
booms. Arcelor was the largest steel company in the world, and Doll felt that it should take
the lead in this consolidation phase.
Two days later Doll was looking far from pleased. The hostile bidder had itself became a
target: on 26 January Mittal Steel made an unsolicited bid for Arcelor at C$28.21 per share,
valuing Arcelors equity at 18 billion. Approximately 25% of the amount would be paid in
cash and the remainder in shares in Mittal. On 29 January Arcelor officially rejected the bid,
saying that Mittal and Arcelor did not share the same strategic vision, business model or
values. Guy Doll stated that the two companies management styles were diametrically
opposed and that different product ranges and little geographic overlap do not constitute a
strategic fit. Moreover he pointed out that Mittal was trading at its all time high and had a
free float of only 12 %. This suggested that the stock was likely to be overvalued and that the
small float would prevent Arcelor shareholders from getting out at current prices.
Another argument for rejecting the bid was that the price proposed (28.21) was too low.
Although this represented a 40% premium above the pre-announcement price, management
believed that the stock was significantly undervalued. Based on its forecasts of future cash
flows, the company had estimated its fair value in the fall of 2005 was at least 26 per share.
At that time, the company had seriously considered making a repurchase tender offer for its
own shares to correct this undervaluation, but finally decided against it because it could have
been perceived as a mixed signal. Repurchasing shares would have meant using cash the firm
had earmarked to complete its consolidation strategy. It would have given the wrong signal,
suggesting that management no longer believed in the strategy.
Mittals bid created shockwaves in continental Europe, where such Anglo-Saxon tactics were
uncommon. Politicians from various countries, including France, Luxembourg and Spain,
rallied behind Arcelors management and spoke out against the bid, possibly influenced by
concern that the takeover would generate job losses. Arcelor had approximately 100,000
employees, mainly in Europe. This European political response led to accusations of racism
by the Indian government who accused Europeans of fighting the bid simply because Lakshmi
Mittal, the CEO and owner of Mittal Steel, was of Indian descent, and not part of the
European business establishment.

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Mittal Steel
Mittal Steel came into existence in 1989 and expanded rapidly by taking over existing steel
companies, many state-owned. From January 2002 until December 2005 its stock price rose
by more than 1000%. During this period, Mittal had the best stock price performance of any
steel company in the world. Unlike Arcelor, which had a diversified ownership structure, 88%
of Mittals shares were owned by the Mittal family. The companys strategy was similar to
Arcelors (see exhibit 1), in the sense that it also believed that global consolidation and
vertical integration were the way forward. As a result of its acquisition strategy, by the end of
2005 Mittal had become the worlds largest, most global, steel company, with more than
227,000 employees. Exhibit 2 shows that approximately 42% of its shipments came from the
Americas, 35% from Europe and 23% from Asia and Africa. European production was mainly
concentrated in the low labour cost countries of Eastern Europe. As a result of its lower costs,
Mittal was able to generate operating margins of 28% in 2004 and 17% in 2005, significantly
above the industry average. The acquisition of Arcelor was a further step in the consolidation
strategy. As CEO Lakshmi Mittal stated, when announcing 2005 full results on 15 February
2006:
The strength of our performance in current market conditions illustrates the
increased stability that industry consolidation has delivered. This same logic lies
at the heart of our proposed strategic merger with Arcelor. The steel industry
needs strong, value creating, growing companies with global reach, which this
combination would deliver. We are pleased with the very positive reception our
offer has received.
The last comment referred to the positive market response to the offer. Exhibit 3 shows daily
stock prices, daily excess returns relative to a Steel company index (which excludes Mittal
and Arcelor) from January 2006 until the beginning of August 2006. Exhibit 4 and exhibit 5
provide a graphic illustration of some of the data in exhibit 3. On the day of the
announcement of the bid, January 27, Mittalss stock price rose by 6.1% from 26.03 to
27.63, and by another 7.5% on January 28. During these two days, the Standard and Poors
500 only increased by 0.9%. Note from exhibit 3 that the steel index increased by 7% during
the same two-day period.

Defensive Moves
Arcelors financial advisors came up with a shortlist of potential takeover defences:

get regulatory and/or political support to block the bid;

make a buyback tender offer at a premium to shake out the weak hands;

pay out excess cash through a dividend;

search for a white squire;

search for a white knight;

lock up crown jewels;

start a PR campaign to convince the market that the bid was much too low;

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restructure the ownership to a leveraged recapitalization or a leveraged buyout;

initiate a bid for Mittal (the Pac-man defence).

The question was which of these alternatives would be the most effective. As the percentage
of shares held by management and employees was tiny, ultimately the public shareholders
would decide whether they would accept the Mittal bid or not. So far only Luxembourg, the
largest stockholders, owning 5.6% of the company, had said that it was not willing to sell to
Mittal. So, unless Arcelor could make Mittal withdraw its bid by setting up regulatory
hurdles, defensive moves that were considered to be tactics to stay independent, regardless of
Mittals bid price, were likely to be badly perceived by stockholders. The ultimate objective
had to be to get the best deal for stockholders.
Dividend Policy
On 16 February, Arcelor increased its dividend by 85%. With a 10 % payout ratio, Arcelor
had one of the lowest payout ratios in the industry. Paying out excess cash to the shareholders
lowers the value per share. As under French law, a bidder can only revise its bid upwards, the
dividend payment increased the cost to Mittal.
Political/Regulatory Lobby Work
Because Arcelor employed nearly 100,000 people, it might have been able to count on the
support of politicians in Spain, Luxembourg and especially France, where the government had
been promoting economic nationalism through the promotion of national champions. On 1
February 2006, the French Finance Minister, Thierry Breton, disparaged Mittals offer, telling
parliament that he had never seen such a badly prepared takeover attempt1. On 13 February,
a French daily newspaper reported that Arcelor might buy minerals group Eramet, which was
partially controlled by the French state. A deal with Eramet would grow Arcelor and would
mean the French government could defend the combination on the grounds of national
interest. A variant of this defense was employed by Danone, a French company who bought a
hotel that owned a casino in Evian. According to French law no one can operate a casino in
France without government approval. This effectively meant that no one could buy Danone
without French government approval.
The Luxemburg establishment was most helpful. On 15 March, the Luxembourg Chamber of
Commerce proposed amendments to merger and acquisition laws. The amendment would
require any company with a free float of less than 25% to pay for an acquisition with cash. As
Mittal had only a free float of 12%, it would effectively block a takeover bid that currently
involved 75% to be paid in stock. On 23 March, Luxembourgs parliamentary finance
committee backed another change in the countrys takeover laws: it would prevent a bidder
from resubmitting a takeover offer for a listed company in Luxembourg for a period of 12
months. However, such a move would go against the EUs takeover directive, possibly
triggering a legal row with the European Commission. On 24 March the Luxembourg
government decided that it would not change the takeover laws because legal prohibition was
not being considered as the Luxembourg way.

Financial Times

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Buyback Tender Offer

Repurchasing shares at a higher price than the Arcelor bid might induce investors who were
looking for a quick profit, such as arbitrageurs and hedge funds, to tender their shares to the
company. Moreover, the repurchase would increase leverage, reduce excess cash and make
the firm a less attractive takeover target. However, in contrast to the US, where a buyback
needs only to be approved by the board of directors, a repurchase tender offer would have to
have the stockholders approval. If the buyback was simply perceived as a takeover defence,
rather than a signal of undervaluation or increased commitment to shareholder value,
shareholders would not support this move.
On 4 April, Arcelor announced its intention to ask shareholders to distribute 6 billion
through a share buyback tender offer for 150 million shares. This payout would be financed
partially by borrowing 4 billion.
The company was aware of academic research that showed that, on average, share prices rise
after a repurchase tender offer. Specifically they were familiar with an academic study that
predicted total announcement returns (TOTALR) by the following regression:
TOTALR = 0.6 PREM + 0.25 BOUGHT
where PREM is the repurchase premium above the market price and BOUGHT is the
percentage of shares repurchased.
Considering the significant premium paid and shares repurchased, Arcelor expected a
significant price boost from this action. The market would perceive it as a strong signal that
management believed its stock was seriously undervalued and that Mittal was simply trying to
steal the company.
The Dutch treat locking up crown jewels
On the same day (4 April), Arcelor also announced that it was transferring the recently
acquired Dofasco to a special-purpose company, a Dutch foundation. Under this typical Dutch
structure, Mittal would be entitled to the cash flows of Dofasco, but not to the voting rights,
which would be in the hands of 3 administrators who unanimously have to approve the sale of
Dofasco. The foundation can only be dissolved after 5 years. This move would prevent any
acquirer from selling Dofasco for the next five years without the administrators approval.
This created a significant hurdle for Mittal, who had planned to sell Dofasco to ThyssenKrupp after the acquisition of Arcelor was completed. It knew that the US Federal Trade
Commission would have forced the new company to sell Dofasco in order to comply with
anti-trust regulation. Arcelors move would increase the cost to Mittal because, if it could not
sell Dofasco, it would have to sell other US divisions to comply with the regulatory
authorities.
White Knight
Besides Mittal Steel and Arcelor, the next two largest steel companies were Nippon Steel and
JFE holdings, two Japanese companies with similar market capitalisations of around 20

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billion. While in theory they could jump into the fight, Japanese companies had no real track
record of intervening as white knights in hostile overseas acquisitions.
Public Relations Campaign
Instead of making broad statements about the undesirability of the merger, Arcelor decided to
make a clear statement of how much the companys shares would be worth if Arcelor
remained independent. On 3 May, Guy Doll stated in a press release that Arcelor should be
worth 40.7 billion, or around five times EBITDA, the typical industry multiple.
On May 10, Mittal announced it would be willing to increase its bid if management
recommended its offer. Although no such recommendation was made, on May 19 Mittal made
a new revised offer of 11.1 in cash and 1 Mittal share for each Arcelor share. The closing
price of Mittals stock on 18 May was 27.33, which meant that Arcelor shareholders were
offered 38.43 per share, a premium of 37% over the previous offer. He offer would also
improve the corporate governance provisions: the Mittal family would not have any extra
voting rights, so that after the merger they would only control 45 % of the shares.
White Squire
The surprising increase in the offer was made when Arcelor was in talks with Severstal, a
Russian steel company. Apparently rumors about a potential deal with Severstal had reached
Mittal which apparently was making a pre-emptive higher bid. On 26 May Arcelor announced
a merger proposal with Severstal, a Russian company. The transaction valued Arcelor at 44
per share. Severstal would make a cash payment of 1.25 billion and contribute all its steel
assets as well as its iron ore and coal assets in return for a 32% stake in the combined
company, Arcelor-Severstal. Severstal also obtained a break-up fee of 140 million, in case
Arcelor decided to merge with someone else.

The Closing
Because the Severstal deal had been so badly received by investors and in the financial press,
on 7 June 2006 Arcelor seemed to be willing to negotiate a deal with Mittal and agreed to
meet Mittal face-to-face for the first time. However, on 12 June the revised Mittal offer was
rejected. On 19 June Arcelor cancelled the shareholders meeting to vote on the 6 billion
share buyback. On 21 June Severstal improved the terms of its offer. On 23 June it was
reported that Mittal was revising its offer and finally on 25 June Arcelors board
recommended that shareholders accept the improved takeover offer from Mittal.
Under this final offer, Arcelor shareholders would receive 13 Mittal shares and 150.60 in
cash per block of 12 Arcelor shares. Alternatively, investors would be given 40.40 cash per
share as well as an all-share alternative of 11 new Mittal shares for each block of 7 Arcelor
shares. These alternatives were provided under the constraint that, in aggregate, 69% of the
deal would be financed with Mittal common stock. Mittal also offered to acquire Arcelors
convertible bonds in a mixed offer of 13 Mittal shares and 188.42 in cash per batch of 12
Arcelor convertible bonds. It was estimated that, as a result of this offer, after the merger there
would be 1,417 million Mittal shares outstanding, an increase of 713 million shares issued to
Arcelor shareholders and bondholders. Subsequently, Mittal announced a tender offer for all
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Arcelor shares. The tender offer would expire on 13 July and in order for the merger to be
completed, Mittal needed 50.1% of the Arcelor shares to be tendered.

Synergies
On 5 July, Arcelor started a road show aimed at conveying the synergies in the deal to
investors. This was necessary as on that day Mittals stock closed at 22.15, the lowest level
in 2006. Arcelors stock price closed at 35.29, not far below its 2006 high of 37.74 of 30
June.
According to the company, the following synergies could be identified:
Marketing and trading synergies (estimate: 460 million)
Accelerated growth of distribution in developing regions (Eastern Europe, CIS,
Africa)
Cross-selling through enlarged and enhanced product portfolio
Optimisation of order book for cross product flows and logistical savings
Market volume impact of mill specialisation
Manufacturing and process optimization (estimate: 380 million)
Benchmarking and best practice alignment across all operating assets
Optimisation of utilisation of assets through selected mill product specialisation (i.e.
productivity gains with better sequencing rates, fewer changeovers)
Logistical and mill optimisation through transfers of semi-finished products
Purchasing (estimate: 400 million)
Scale effects of standardisation of procurement contracts
Optimisation and efficiencies from maintenance services, sub-contracting, spare parts
and consumables
Logistics savings on optimisation of raw material flows
SGA (estimate: 50 million)
IT synergies
Reduction in external contracts, e.g. consulting services
Duplication in commercial network avoided
Arcelor assumed that during the first year synergies would be equal to 500 million, during
the second, 900 million and from year three on, 1.3 billion (see exhibit 6). Implementing
these synergies would not be a problem, because both companies had a strong track record of
successful integration.

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On 12 July, Mittal announced that, one day before the expiration of the tender offer, 18% of
the shareholders had tendered their shares. On 13 July it announced that at least 50% of the
shares had been tendered. The actual amount turned out to be 92%.

New Payout Policy

On 27 September, Arcelor-Mittal announced a new payout policy, 30% of net income,
financed either by dividend payments or share repurchases. At the time of this decision,
Arcelor-Mittals stock price was 7. The decision to repurchase stock was dependent on the
stock price. Arcelor-Mittal was wondering whether it was indeed a good time to start
repurchasing shares. The company also made a forecast of 12 billion EBITDA in 2006 and
was confident of its EBITDA target of 16 billion for 2008.
Exhibit 7 shows a valuation of 21.22 per share for Arcelor-Mittal, assuming no synergies.
These forecasts were perceived to be reasonable, considering the historical financials of the
companies (see exhibit 8 through 11). The residual value assumed that the companys net new
investments, after 2009, would only generate a rate of return equal to the 8.3% cost of capital.
The company was wondering to what extent the synergy benefits of the merger would warrant
a higher value. This was an important issue as the company wanted to repurchase shares,
rather than pay dividends, while it felt its shares were undervalued.
Some also questioned the use of an unlevered beta of 1.13 for Arcelor. Although this
unlevered beta was higher than the industry average (see Exhibit 12), management felt that
Arcelor-Mittal was much less risky than an average steel company. Arcelor-Mittal had
significant iron ore assets, which made its profits much less risky than those of other steel
companies, who suffered when ore prices rose. The firm was also more globally diversified,
with a larger portfolio of business than the typical steel company. The company was also
pursuing a strategy of price over volume in order to stabilize its profits. This way it believed it
could change the risk perception of the company and bring it more in line with the risk of
metal producers and producers of other construction materials, such as cement.

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Exhibit 1
History of Prior Consolidations

Source: July 2006 Joint Mittal-Arcelor Presentation The Clear Leader in Steel

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Exhibit 2
Mittal Steels Global Reach
Mittal Steel 2005 Shipments by Country
Thousands of Short Tons

Americas
United States of America

14,299

Mexico - Lazaro Cardenas

3,908

Canada

1,461

Trinidad - Point Lisas

796

TOTAL AMERICAS

20,464

Europe
West Europe - Germany and France

3,255

Poland

4,894

Romania

5,164

Czech Republic - Ostava

2,692

Ukraine - Kryvly Rih

493

Others

715

TOTAL EUROPE

17,213

Asia and Africa

Kazakhstan - Temirtau

3,672

South Africa

6,866

Algeria - Annaba

963

TOTAL ASIA AND AFRICA

11,501

MITTAL STEEL COMPANY

49,178

Source: Mittal Steel Q4-2005 Results Report dated February 15, 2006.

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Exhibit 3
Table of Cumulative Excess Returns over Steel Index
Arcelor
Date

02-Jan-06
03-Jan-06
04-Jan-06
05-Jan-06
06-Jan-06
09-Jan-06
10-Jan-06
11-Jan-06
12-Jan-06
13-Jan-06
16-Jan-06
17-Jan-06
18-Jan-06
19-Jan-06
20-Jan-06
23-Jan-06
24-Jan-06
25-Jan-06
26-Jan-06
27-Jan-06
30-Jan-06
31-Jan-06
01-Feb-06
02-Feb-06
03-Feb-06
06-Feb-06
07-Feb-06
08-Feb-06
09-Feb-06
10-Feb-06
13-Feb-06
14-Feb-06
15-Feb-06
16-Feb-06
17-Feb-06
20-Feb-06
21-Feb-06
22-Feb-06
23-Feb-06
24-Feb-06
27-Feb-06
28-Feb-06
01-Mar-06
02-Mar-06
03-Mar-06
06-Mar-06
07-Mar-06
08-Mar-06
09-Mar-06
10-Mar-06

Copyright 2009 INSEAD

Share
Price
21.14
21.27
21.94
21.90
21.89
22.03
22.02
22.14
22.11
21.91
21.27
21.08
20.86
21.12
20.99
20.91
21.61
21.83
22.22
28.54
29.75
28.90
29.23
29.34
30.53
31.31
30.32
29.31
29.39
29.30
30.20
30.12
29.79
29.90
30.32
30.40
30.30
30.40
30.45
30.40
30.65
30.66
31.25
32.05
32.85
33.05
32.20
31.56
31.72
31.70

Mittal

Cumulative
Excess
Excess
Return
Return
1%
1%
-2%
-1%
2%
1%
0%
1%
-1%
-1%
0%
-1%
0%
-1%
1%
0%
2%
2%
0%
2%
-3%
-1%
-1%
-2%
0%
-3%
-1%
-4%
1%
-3%
-2%
-5%
-1%
-6%
0%
-6%
-1%
-6%
23%
16%
5%
21%
-3%
18%
1%
19%
2%
21%
3%
24%
0%
24%
1%
25%
-2%
23%
1%
24%
0%
24%
4%
28%
-2%
26%
0%
26%
-1%
24%
2%
26%
0%
26%
-1%
25%
-1%
25%
0%
24%
-1%
23%
1%
24%
1%
26%
0%
26%
3%
28%
1%
29%
1%
30%
-1%
29%
-2%
27%
1%
28%
-3%
25%

10

Share
Price
23.27
22.50
22.52
22.23
22.40
23.55
23.47
23.72
23.67
23.67
23.62
23.74
23.22
23.61
23.50
23.38
24.38
26.06
26.03
27.63
29.69
29.20
29.69
29.40
29.55
29.77
29.60
27.73
28.49
27.60
28.60
28.92
28.42
27.00
27.85
28.20
27.68
27.69
28.21
28.36
28.32
27.90
28.40
29.15
29.79
29.56
28.43
27.90
28.00
27.79

Excess
Return
4%
-6%
-1%
-1%
0%
4%
0%
2%
2%
1%
0%
0%
-1%
0%
1%
-2%
0%
6%
-2%
0%
8%
-2%
2%
1%
0%
-2%
3%
-5%
4%
-3%
5%
0%
-1%
-7%
3%
1%
-3%
-1%
1%
0%
0%
0%
0%
3%
0%
-1%
-2%
-2%
0%
-4%

Cumulative
Excess
Return
4%
-2%
-3%
-4%
-5%
-1%
-1%
1%
3%
3%
3%
3%
2%
1%
2%
0%
0%
6%
3%
4%
12%
10%
11%
12%
12%
10%
13%
8%
12%
9%
13%
13%
12%
5%
9%
10%
7%
6%
8%
7%
7%
7%
7%
10%
10%
10%
8%
6%
7%
3%

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Arcelor
Date

13-Mar-06
14-Mar-06
15-Mar-06
16-Mar-06
17-Mar-06
20-Mar-06
21-Mar-06
22-Mar-06
23-Mar-06
24-Mar-06
27-Mar-06
28-Mar-06
29-Mar-06
30-Mar-06
31-Mar-06
03-Apr-06
04-Apr-06
05-Apr-06
06-Apr-06
07-Apr-06
10-Apr-06
11-Apr-06
12-Apr-06
13-Apr-06
14-Apr-06
17-Apr-06
18-Apr-06
19-Apr-06
20-Apr-06
21-Apr-06
24-Apr-06
25-Apr-06
26-Apr-06
27-Apr-06
28-Apr-06
01-May-06
02-May-06
03-May-06
04-May-06
05-May-06
08-May-06
09-May-06
10-May-06
11-May-06
12-May-06
15-May-06
16-May-06
17-May-06
18-May-06
19-May-06
22-May-06
23-May-06
24-May-06
25-May-06

Copyright 2009 INSEAD

Share
Price
31.77
31.09
31.46
31.10
31.50
31.78
31.71
31.60
31.60
31.75
31.75
32.10
32.62
32.72
32.53
32.79
32.50
32.90
33.00
32.96
33.04
32.96
32.81
33.10
33.10
33.10
33.05
33.55
33.40
33.90
34.09
34.11
34.08
33.40
32.60
32.60
33.69
33.83
34.16
34.95
35.00
35.76
35.38
35.45
34.65
33.93
33.06
32.85
32.00
34.84
32.90
33.88
33.60
34.06

Mittal

Cumulative
Excess
Excess
Return
Return
1%
26%
-4%
22%
0%
22%
-3%
19%
0%
19%
1%
20%
-1%
19%
-1%
18%
-1%
17%
-1%
16%
0%
16%
2%
18%
0%
18%
0%
18%
0%
18%
0%
18%
-2%
16%
1%
17%
-1%
16%
1%
17%
0%
18%
1%
19%
-1%
18%
0%
18%
0%
18%
-1%
17%
-2%
14%
-1%
13%
3%
16%
0%
16%
0%
16%
0%
17%
-1%
16%
1%
17%
-4%
14%
-2%
12%
1%
13%
0%
13%
0%
13%
1%
14%
0%
14%
2%
16%
-2%
14%
2%
16%
0%
17%
1%
18%
-1%
17%
3%
20%
-2%
18%
7%
25%
0%
26%
1%
26%
0%
26%
-3%
23%

11

Share
Price
27.81
28.46
28.70
28.42
28.94
29.90
30.03
29.36
30.03
30.26
30.99
31.33
31.89
32.50
31.59
32.27
31.10
31.41
31.17
30.98
31.60
31.00
30.67
31.30
31.30
31.30
31.70
31.90
31.25
31.67
31.49
30.98
30.86
30.39
29.23
29.23
30.30
30.28
31.30
31.66
32.50
33.10
32.65
32.08
30.73
28.99
28.13
28.00
27.33
25.41
23.91
24.06
23.89
24.52

Excess
Return
1%
0%
0%
-3%
1%
3%
0%
-3%
2%
0%
2%
2%
0%
2%
-2%
1%
-4%
1%
-2%
0%
2%
0%
-1%
1%
0%
-1%
-1%
-2%
1%
0%
-1%
-1%
-1%
2%
-5%
-2%
1%
0%
2%
0%
2%
2%
-2%
0%
-2%
-3%
-1%
4%
-2%
-9%
0%
-2%
0%
-2%

Cumulative
Excess
Return
4%
4%
4%
1%
2%
5%
5%
2%
3%
3%
5%
7%
7%
8%
7%
7%
3%
4%
2%
3%
5%
4%
3%
4%
4%
2%
2%
0%
1%
1%
0%
-1%
-2%
-1%
-6%
-8%
-6%
-7%
-4%
-4%
-2%
0%
-2%
-2%
-4%
-6%
-8%
-4%
-6%
-14%
-15%
-16%
-16%
-18%

02/2009-5471

109-006-1

Arcelor
Date

26-May-06
29-May-06
30-May-06
31-May-06
01-Jun-06
02-Jun-06
05-Jun-06
06-Jun-06
07-Jun-06
08-Jun-06
09-Jun-06
12-Jun-06
13-Jun-06
14-Jun-06
15-Jun-06
16-Jun-06
19-Jun-06
20-Jun-06
21-Jun-06
22-Jun-06
23-Jun-06
26-Jun-06
27-Jun-06
28-Jun-06
29-Jun-06
30-Jun-06
03-Jul-06
04-Jul-06
05-Jul-06
06-Jul-06
07-Jul-06
10-Jul-06
11-Jul-06
12-Jul-06
13-Jul-06
14-Jul-06
17-Jul-06
18-Jul-06
19-Jul-06
20-Jul-06
21-Jul-06
24-Jul-06
25-Jul-06
26-Jul-06
27-Jul-06
28-Jul-06
31-Jul-06
01-Aug-06

Copyright 2009 INSEAD

Share
Price
33.05
32.80
32.85
33.30
34.00
34.29
33.80
32.80
33.29
32.10
33.70
33.30
32.66
32.77
32.77
32.77
34.70
35.40
35.02
35.02
35.02
37.80
37.00
37.19
37.51
37.74
36.92
36.07
35.29
35.45
36.84
36.90
36.88
38.22
38.52
39.04
39.22
38.89
40.05
40.55
40.00
39.53
39.58
43.00
42.40
41.64
41.75
42.00

Excess
Return
-6%
5%
4%
0%
0%
0%
2%
-1%
4%
-3%
5%
1%
1%
-1%
-4%
1%
6%
1%
-4%
0%
-3%
7%
-2%
-1%
-2%
0%
-3%
-3%
0%
1%
3%
0%
0%
4%
5%
1%
3%
-1%
-1%
3%
1%
-3%
-2%
8%
-1%
-4%
0%
2%

Mittal

Cumulative
Excess
Return
17%
22%
26%
26%
26%
26%
28%
27%
31%
29%
34%
35%
35%
34%
30%
30%
36%
38%
34%
34%
32%
39%
37%
35%
33%
33%
30%
27%
28%
28%
31%
32%
32%
36%
40%
42%
44%
43%
43%
46%
47%
44%
42%
50%
49%
45%
45%
47%

12

Share
Price
25.00
26.25
25.32
25.71
26.56
26.58
25.97
24.89
24.67
23.60
24.24
23.59
23.35
23.36
24.70
24.20
24.88
25.35
26.03
25.99
25.32
24.38
23.97
23.58
24.12
24.19
23.54
22.90
22.15
22.14
23.44
23.30
22.82
24.39
26.75
25.40
25.20
25.20
26.19
26.81
26.05
25.97
25.50
26.50
26.40
26.25
26.60
27.05

Excess
Return
-1%
5%
0%
0%
1%
-1%
1%
-2%
2%
-3%
2%
0%
1%
-2%
1%
-1%
3%
1%
0%
0%
-5%
-4%
-1%
-4%
-1%
0%
-4%
-3%
-1%
0%
5%
-1%
-2%
7%
14%
-5%
1%
0%
0%
5%
0%
-2%
-4%
3%
0%
-2%
1%
3%

Cumulative
Excess
Return
-19%
-14%
-14%
-14%
-13%
-14%
-12%
-14%
-12%
-16%
-13%
-14%
-12%
-14%
-12%
-14%
-11%
-10%
-10%
-9%
-15%
-19%
-21%
-24%
-25%
-25%
-29%
-32%
-33%
-33%
-28%
-28%
-30%
-23%
-9%
-14%
-13%
-13%
-13%
-8%
-8%
-11%
-15%
-12%
-12%
-14%
-13%
-10%

02/2009-5471

109-006-1

Exhibit 4
Post-Takeover Bid Share Prices

2006 Share Prices

Adjusted Share Price ()

45
40

Arcelor

35

Mittal

30
25
20
15
10
5

Copyright 2009 INSEAD

13

Aug-06

Jul-06

Jun-06

May-06

Apr-06

Mar-06

Feb-06

Jan-06

02/2009-5471

109-006-1

Exhibit 5
Pre- and Post-Takeover Bid Cumulative Excess Returns over Steel Index

2005 Cumulative Abnormal Returns

Versus Steel Index

Cumulative Abnormal Return (%)

60%

Arcelor
40%

Mittal

20%

0%

-20%

Dec-05

Nov-05

Oct-05

Sep-05

Aug-05

Jul-05

Jun-05

May-05

Apr-05

Mar-05

Feb-05

Jan-05

-40%

2006 Cumulative Abnormal Returns

Versus Steel Index

Cumulative Abnormal Return (%)

60%

Arcelor
40%

Mittal

20%

0%

-20%

Copyright 2009 INSEAD

14

Aug-06

Jul-06

Jun-06

May-06

Apr-06

Mar-06

Feb-06

Jan-06

-40%

02/2009-5471

109-006-1

Exhibit 6
Management forecast of synergies

Source: July 2006 Joint Mittal-Arcelor Presentation The Clear Leader in Steel

Copyright 2009 INSEAD

15

02/2009-5471

109-006-1

Exhibit 7
Arcelor-Mittal Valuation Model
Forecasts
2004

Sales
COGS + SGA
EBITDA
Depreciation
EBIT
Taxes
NOPLAT
Depreciation
Capex
WCR
Free Cash Flow
PPE
Capex=PPE+Depr
WCR
WCR
Invested Capital
ROIC
RONIC (set = to WACC)

48
37
10
1
8

2005

2006

2007

2008

2009

CV

047
577
470
592
878

55
44
10
1
8

244
560
684
932
752

66 735
53 388
13 347
2 536
10 811
2 703
8 108

75 410
61 836
13 574
2 790
10 784
3 235
7 549

83 705
68 638
15 067
2 930
12 137
3 641
8 496

87 054
76 607
10 446
3 047
7 400
2 220
5 180

88 795
79 915
8 879
3 108
5 772
1 731
4 040

1 592

1
10
1
(10

932
891
875
834)

2 536
6 289
2 237
2 118

2 790
4 432
1 689
4 218

2 930
5 577
1 615
4 235

3 047
2 679
652
4 896

3 108
3 108
4 040

17 318

26
10
10
1
37

277
891
753
875
030

30
6
12
2
43

31
4
14
1
46

34
5
16
1
50

33 951
2 679
16 944
652
50 895
10%

8 878
26 196

031
289
989
237
020
22%

672
432
678
689
350
18%

319
577
293
615
612
18%

8%

Valuation
2004

2005

2006

Discount Factor
PV(FCF)
Total PV(FCF)
Continuation Value (CV)
PV(CV)
Enterprise Value {=Total PV(FCF) + PV(CV)}
- Financial Debt
- Minority Interest
+ Affiliates
- Pension Obligations
TOTAL EQUITY VALUE
Estimated Shares Outstanding (millions)
Equity Value (EUR per Share)

Copyright 2009 INSEAD

1,00
2 118
13 472

2007

0,92
3 894

2008

0,85
3 608

2009

CV

0,79
3 851
48 490

38 140
51 612
18 200
3 467
2 434
2 311
30 068
1 417
21,22

16

02/2009-5471

109-006-1

Exhibit 8
Mittal Income Statement
MITTAL
Income Statement

Income Statement

in $ Million

in EUR Million

Sales
Gross Profit
Operating Income
EBITDA
EBIT
Less Interest Expense
Pre-Tax Income
Less Taxes
Net Income After Tax
Less Minority Interest
Net Income

2004

2005

22 197
6 950
6 146
6 951
6 398
265
6 133
817
5 316
615
4 701

28 132
5 808
4 746
5 871
5 042
339
4 703
818
3 885
520
3 365

Sales
Gross Profit
Operating Income
EBITDA
EBIT
Less Interest Expense
Pre-Tax Income
Less Taxes
Net Income After Tax
Less Minority Interest
Net Income

Cash Flow Statement

Cash Flow Statement

in $ Million

in EUR Million
2004

2005

4 701
553
86
615
(115)
(1 229)
4 611

3 365
829
155
520
(375)
(520)
3 974

Capital Expenditures
Net Assets from Acquisitions
Disposal of Fixed Assets
Other Investing Cash Flows
Net Cash Flow - Investing

(898)
(19)
83
33
(801)

(1 181)
(6 220)
59
(270)
(7 612)

Bank and Debt Proceeds

Bank and Debt Payments
Purchase of Stock
Proceeds from Stock Issue
Cash Dividends
Other net financing activities
Net Cash Flow - Financing

3 519
(5 040)
(54)
9
(763)
(2 329)

10 006
(4 557)
3
(2 092)
(11)
3 349

Net Income
Depreciation
Def Income Taxes
Minority Interest
Other Adj. to Cash from Operations
Cash from Changes in Operating Assets
Net Cash Flow - Operations

Effect of Exchange Rates on Cash

Net Cash Flow

254
1 735

Copyright 2009 INSEAD

22 633
4 673
3 818
4 723
4 059
273
3 786
659
3 128
419
2 709

2004

2005

2 707
667
125
418
(302)
(418)
3 197

Capital Expenditures
Net Assets from Acquisitions
Disposal of Fixed Assets
Other Investing Cash Flows
Net Cash Flow - Investing

(723)
(15)
67
27
(645)

(950)
(5 004)
47
(217)
(6 124)

Bank and Debt Proceeds

Bank and Debt Payments
Purchase of Stock
Proceeds from Stock Issue
Cash Dividends
Other net financing activities
Net Cash Flow - Financing

2 833
(4 058)
(43)
7
(614)
(1 875)

8 050
(3 666)
2
(1 683)
(9)
2 694

204
1 397

(138)
(370)

Effect of Exchange Rates on Cash

Net Cash Flow

Source: Mittal 2005 Annual Report

2005

17 871
5 595
4 948
5 596
5 151
213
4 938
658
4 280
495
3 785

3 785
445
69
495
(93)
(989)
3 712

Net Income
Depreciation
Def Income Taxes
Minority Interest
Other Adj. to Cash from Operations
Cash from Changes in Operating Assets
Net Cash Flow - Operations

(171)
(460)

2004

Source: Mittal 2005 Annual Report

Values converted to EUR at average exchange rate for year.

17

02/2009-5471

109-006-1

Exhibit 9
Mittal Balance Sheet
Mittal Balance Sheet

in $ Million

in EUR Million
2004

2005

Cash & Short Term Inv.

Receivables
Total Inventories
Other Current Assets
Total Current Assets
Net Property, Plant & Equip.
Investments in Affiliates
Other Assets
Total Assets

2 634
2 006
4 013
972
9 625
7 562
667
1 299
19 153

2 149
2 287
6 036
1 240
11 712
15 539
1 187
2 604
31 042

Cash & Short Term Inv.

Receivables
Total Inventories
Other Current Assets
Total Current Assets
Net Property, Plant & Equip.
Investments in Affiliates
Other Assets
Total Assets

Accounts Payable
Short Term Debt and Current LTD
Dividend Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Deferred Tax Liabilities
Deferred Employee Benefits
Other Long-Term Liabilities
Total Liabilities
Minority Interest

1 899
341
1 650
2 340
6 230
1 639
955
1 931
809
11 564
1 743

2 504
334
2 777
5 615
7 974
1 602
2 506
1 361
19 058
1 834

Common Stock
Treasury Stock
Capital Surplus
Retained Earnings
Other Comprehensive Income
Common Shareholders' Equity
Total Liabilities & Equity

59
(123)
552
4 739
619
5 846
19 153

60
(111)
2 456
7 891
(146)
10 150
31 042

Source: Mittal 2005 Annual Report

Copyright 2009 INSEAD

2004

2005

2 121
1 615
3 231
783
7 749
6 088
537
1 046
15 420

1 730
1 841
4 860
998
9 429
12 510
956
2 096
24 992

Accounts Payable
Short Term Debt and Current LTD
Dividend Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Deferred Tax Liabilities
Deferred Employee Benefits
Other Long-Term Liabilities
Total Liabilities
Minority Interest

1 529
275
1 328
1 884
5 016
1 320
769
1 555
651
9 310
1 403

2 016
269
2 236
4 521
6 420
1 290
2 018
1 096
15 344
1 477

Common Stock
Treasury Stock
Capital Surplus
Retained Earnings
Other Comprehensive Income
Common Shareholders' Equity
Total Liabilities & Equity

48
(99)
444
3 815
498
4 707
15 420

48
(89)
1 977
6 353
(118)
8 172
24 992

Source: Mittal 2005 Annual Report

Values converted to EUR at average exchange rate for year.

18

02/2009-5471

109-006-1

Exhibit 10
Arcelor Income Statement
Arcelor Income Statement
Income Statement
in EUR million

Sales
Gross Profit
Operating Income
EBITDA
EBIT
Less Interest Expense
Pre-Tax Income
Less Current Taxes
Net Income After Tax
Less Minority Interest
Net Income

2004

2005

30 176
8 062
3 314
4 874
3 727
521
3 206
513
2 693
403
2 290

32 611
9 275
4 376
5 958
4 693
254
4 439
161
4 278
432
3 846

2004

2005

Cash Flow Statement

in EUR million

After-Tax Profit
Profit for equity method Companies
Depreciation and Amortization
Net change in provisions
Net profit on asset disposals
Dividends received
Change in working capital
Other items
Net Cash Flow - Operations

2 693
(336)
1 147
31
(80)
31
(726)
445
3 205

4 278
(222)
1 265
(107)
(63)
51
(615)
(123)
4 464

Acquisition of Assets
Acquisition of Subsidiaries
Acquisition of Financial Fixed Assets
Disposal of Assets
Disposal of Subsidiaries
Disposal of Financial Fixed Assets
Net Cash Flow - Investing

(1 424)
(302)
(414)
107
459
192
(1 382)

(2 070)
57
(331)
82
331
325
(1 606)

1 136
(64)
(249)
1 205
(1 578)
(96)

12
(560)
499
(2 340)
-

354

(2 389)

Capital increase of Arcelor SA

Other net Contributions to Equity
Dividends Paid
Proceeds from Borrowing
Repayments
Repurchase of minority interests
Net Cash Flow - Financing
Effect of Exchange Rates on Cash
Net Cash Flow

(24)
2 153

133
602

Source: Arcelor 2005 Annual Report

Copyright 2009 INSEAD

19

02/2009-5471

109-006-1

Exhibit 11
Arcelor Balance Sheet
ARCELOR BALANCE SHEET

in EUR Million
2004

2005

Cash & Short Term Inv.

Receivables
Total Inventories
Other Current Assets
Total Current Assets
Net Property, Plant & Equip.
Investments in Affiliates
Deferred Tax Assets
Other Assets
Total Assets

4 043
3 757
6 801
1 372
15 973
11 230
1 366
1 300
1 369
31 238

4 645
3 716
7 580
1 779
17 720
13 767
1 478
1 347
1 604
35 916

Accounts Payable
Short Term Debt and Current LTD
Other Payables
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Benefits
Deferred Taxes
Other Long Term Provisions
Other Liabilities
Total Liabilities

4 997
2 293
2 848
249
10 387
4 478
2 539
605
920
82
19 011

5 228
1 623
2 879
274
10 004
4 341
2 283
571
943
141
18 283

1 415

2 524

3 199
5 397
2 619
-403
10 812
31 238

3 199
5 397
6 364
149
15 109
35 916

Minority Interest
Subscribed Capital
Share Premium
Consolidated Reserves
Translation Reserve
Common Shareholders' Equity
Total Liabilities & Equity

Source: Arcelor 2005 Annual Report

Copyright 2009 INSEAD

20

02/2009-5471

109-006-1

Exhibit 12
Unlevered Betas of Various Industries

Copyright 2009 INSEAD

21

02/2009-5471

4,5%
40%
30%
3,5%
1,13
5%
11,8%
60%
8,3%

Cost of Capital
Cost of Debt (rd)
Target D/V
Tax Rate
Risk-Free Rate (rf)
Unlevered beta
Market Risk Premium
Cost of Equity (re)
Target E/V
WACC

Copyright 2009 INSEAD

1,6573

18%

WCR (% of Sales)

Levered beta

36%

78,2%
21,8%
3,3%
18,5%

2004

PPE (% of Sales)

Sales Growth (%/yr)

COGS + SG&A (% of Sales)
EBITDA Margin (% of Sales)
Depreciation (% of Sales)
EBIT Margin (% of Sales)
Marginal Tax Rate
NOPLAT (% of Sales)

Assumptions

Yellow cells are inputs

Blue text is forecast or estimate

19%

48%

15,0%
80,7%
19,3%
3,5%
15,8%

2005

All values in EUR Million (unless otherwise stated)

Mittal - Arcelor Valuation Model

19%

45%

20,8%
80,0%
20,0%
3,8%
16,2%
25,0%
12,2%

2006

19%

42%

13,0%
82,0%
18,0%
3,7%
14,3%
30,0%
10,0%

2007

19%

41%

11,0%
82,0%
18,0%
3,5%
14,5%
30,0%
10,2%

2008

19%

39%

4,0%
88,0%
12,0%
3,5%
8,5%
30,0%
6,0%

2009

19%

37%

2,0%
90,0%
10,0%
3,5%
6,5%
30,0%
4,6%

CV

047
577
470
592
878

2004

26 196

8 878

17 318

1 592

48
37
10
1
8

2004

22

Discount Factor
PV(FCF)
Total PV(FCF)
Continuation Value (CV)
PV(CV)
Enterprise Value {=Total PV(FCF) + PV(CV)}
- Financial Debt
- Minority Interest
+ Affiliates
- Pension Obligations
TOTAL EQUITY VALUE
Estimated Shares Outstanding (millions)
Equity Value (EUR per Share)

Valuation

PPE
Capex=PPE+Depr
WCR
WCR
Invested Capital
ROIC
RONIC (set = to WACC)

Depreciation
Capex
WCR
Free Cash Flow

Sales
COGS + SGA
EBITDA
Depreciation
EBIT
Taxes
NOPLAT

Forecasts

Exhibit 13
Spreadsheet Valuing Arcelor Mittal, with Synergies (part I)

277
891
753
875
030

932
891
875
834)

244
560
684
932
752

2005

26
10
10
1
37

1
10
1
(10

55
44
10
1
8

2005

031
289
989
237
020
22%

38 307
51 779
18 200
4 334
2 434
2 889
28 790
1 417
20,32

1,00
2 118
13 472

2006

30
6
12
2
43

2 536
6 289
2 237
2 118

66 735
53 388
13 347
2 536
10 811
2 703
8 108

2006

319
577
293
615
612
18%

0,85
3 608

2008

34
5
16
1
50

2 930
5 577
1 615
4 235

83 705
68 638
15 067
2 930
12 137
3 641
8 496

2008

02/2009-5471

0,92
3 894

2007

31 672
4 432
14 678
1 689
46 350
18%

2 790
4 432
1 689
4 218

75 410
61 836
13 574
2 790
10 784
3 235
7 549

2007

0,79
3 851

2009

33 951
2 679
16 944
652
50 895
10%

3 047
2 679
652
4 896

87 054
76 607
10 446
3 047
7 400
2 220
5 180

2009

48 490

0,79

CV

8%

3 108
3 108
4 040

88 795
79 915
8 879
3 108
5 772
1 731
4 040

CV

109-006-1

109-006-1

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