A whiff of eau de cologne
Convincing governments is still most crucial for Mittal Steel

(column by Smita Polite)

Arcelor CEO Guy Dolle is perhaps getting over his aversion towards "eau de cologne". In one of his now infamous jibes at the "company of Indians," he had called Mittal steel eau de cologne and likened Arcelor's steel to perfume. But on April 28, 2006, Arcelor softened its tough stance on Mittal's $23 billion hostile bid, which had unexpectedly sprung up in late January this year.

"If Mittal Steel makes a bid exclusively in cash that values the company properly, the board will re-examine the situation," Arcelor Chairman Joseph Kinsch declared at the annual general meeting in Luxembourg. If the bid is successful, the combined company would be a 100 million tonne plus steel producer, besides capturing more than 10% of the global market share. In verbal wars, Mittal had consequently declared that it would sell off Dofasco (acquired by Arcelor recently) to Thyssenkrupp at a low price if it succeeded in taking over Arcelor. Meanwhile, without consulting the shareholders, Arcelor directors handed over the newly acquired Canadian steel company Dofasco to Strategic Steel Stichting (S3), a Dutch trust. S3 has independent selling rights over Dofasco for the next five years. However, this further complicated matters for Arcelor, as the latest 'crown jewel sale' is being viewed as an example of poor corporate governance.

While that bit of negative publicity of Arcelor might be a one up for Mittal, it is still not going to be easy. Analysts claim that Mittal will defi nitely have to raise the bid, what with Arcelor management continuously calling the bid "undervalued." But this analysis has to be tempered with two critiques. Firstly, Arcelor has not seen any rival bid that could boost up the market share price further. Arcelor's current market price (33.69 euro) has been boosted primarily because of Mittal's bid price (28.21 euros) which, at that time in January 2006, was 27% above Arcelor's share price. Secondly, and more importantly, an impulsive April dividend payout to Arcelor's shareholders (with an extra $6.17 billion cash payout) actually would backfire in the coming weeks on Arcelor as share prices always fall after discounting the dividend.

In reality, the toughest task for Mittal, as had been forecasted & analysed previously by B&E (February 10-23, 2006) would still be appeasing the governments of Luxembourg, Spain & France who have yet not agreed to the takeover. "Clearly, the French government has stood in the way of takeovers of French companies in the past. Th is may be Mittal's most difficult problem," said Charles Bradford, President, Bradford Research. Mittal should now invest in improving his public relations and in appeasing the job-loss fears of European bureaucrats. Once the governments are on his side, he could peacefully go ahead and bottle the perfume Dolle produces.

(End of Smita Polite column)

The UK disaster
PSA should close French plant too

(column by Karan Mehrishi)

How can a nation that gave the world some of the most prolific brands like the Jaguar and Aston Martin, now be deemed unviable for car manufacturing? This dilemma for UK is real, as proved by major job losses at the Birmingham based MG Rover plant and at Jaguar's production facility. Unfortunately, this dilemma got exacerbated recently, when Peugeot Citroen (PSA) announced a decision to close down its Ryton plant in UK, resulting in a loss of around 2,300 jobs. The UK plant closure is just one of the fallouts of PSA's increasing problems over the past few years. PSA's spiralling logistical costs have ensured that its operating margins have come down to a dismal 4.1%. PSA's net income itself is on a downturn with year 2005 figures diving down to $848.8 million from $1.07 billion a year before. Unfortunately, PSA's blunders, even on tactical issues, have exacerbated their position.

The UK plant closure is a case to point. In 2004, the UK government had offered a £14 million pound grant to PSA to support the plant. This grant was strangely refused outright by PSA. Now, distance from suppliers in eastern Europe is alleged by PSA to be the cause of unbearable logistical costs for its UK plant. British unions have protested saying the plant is in reality profitable. The UK unions have some weight in their argument as the 206 model will continue to get produced in France - because of French government's exit policies and presence of extremely tough unions - even though similar cost disadvantages exist even there. According to Herald Hendrikse, auto analyst, Credit Suisse, "The PSA decision...suggests something about the UK political landscape; the suggestion of unions being less powerful in UK seems the correct conclusion".

Of priority now is for PSA to close down even its French plant & shift base closer to supply sources in Eastern Europe, apart from re-engineering supply chains. Until PSA is able to mark out such situational inconsistencies, the road ahead might surely come up to a dead end.

(End of Karan Mehrishi column)

The port of no return
Hutchison withdrawing from port handling is illogical

(column by Steven Philip Warner)

Hutchison Whampoa (HWL) is a name almost synonymous with telecom globally. And this fact is oft en missed that HWL conducts diversified businesses like port operations, hotels, retail, energy, infrastructure & finance and earns profits in all of them; except the one it's most famous for; telecom! That looks to be the compelling reason why HWL (the world's largest port operator) signed an agreement on April 21, 2006, to sell a 20% stake in the form of equity and loan interest in each of Hutchison Port Holdings Limited and Hutchison Ports Investments (HPI) respectively, to Singapore's PSA International.

The deal follows the June 2005 sale of a major stake by HWL in a Hong Kong container terminal to PSA for $925 million. The Group Managing Director of Hutchison Whampoa, Canning Fok, said, "The transaction represents an excellent opportunity to crystallise value for the company and shareholders." The current sale would yield a profit of $3.12 billion to HWL, which, analysts have forecast, looks destined to be used to resurrect its ailing 3G business. But the fact is that on one hand, while total world trade is forecasted to rise by about 7% in 2006, the available port capacities are rising by only 4.7%.

By current trends, though capacity utilisation is forecasted to be 100% by 2009, the industry in general needs to invest $14 billion by 2007 to avoid demand outstripping supply. That clearly proves that HWL, instead of attempting to re-orient investments to telecom, should actively target investing back into the ports business. Though the group's Hong Kong pre-tax earnings from international ports regressed by 5% year on year - primarily due to tariff pressures and heavy competition - the expected massive global demand supply gap is enough to forecast extremely high and healthy future growth rates. Port capacity expansion is surely the call of the day, especially given the fact that telecom is the only business where HWL continues to suffer losses!

(End of Steven Philip Warner column)

The Death of Reliance?
Rather than just purchasing 5%, Chevron should immediately takeover Reliance Petroleum Ltd.

(column by Nidhi Sharma)

Oil's well with Mukesh Ambani, especially since Reliance Petroleum Ltd (RPL) IPO got the shot in the arm it needed, thanks to global giant Chevron. And for that matter, Chevron's $300 million investment for a 5% stake in RPL looks very positive for the Indian oil sector. The fact that Chevron has reserved the right to acquire another 24% of equity stake in RPL is testimony that the optimism is not entirely unfounded. In case Chevron exercises this option, it would be the largest FDI from any MNC in a particular project in India.

A company like Chevron typically has a larger plan, hence its forthcoming moves in India will be closely observed. To elaborate what Chevron means to the oil industry, allow us to present some facts. Chevron's global refining capacity exceeded 2 million barrels of oil per day at the end of 2005, and its marketing network includes nearly 26,500 retail outlets (including affiliate companies) in 90 countries. With net income of $14.1 billion in2005, Chevron is truly a 'black gold' behemoth. Speaking on the tie up with RPL, Chevron Chairman & CEO Dave O'Reilly said, "We are very pleased to have forged this relationship... This underscores the importance of Asia to Chevron generally and India specifically."

In terms of the larger game plan, the deal gives Chevron the leverage to process what it explores from the newly acquired Unocal oil fields in South East Asia at the mammoth 30 million tonne Jamnagar refinery (slated to be operational by December 2008). Also, it can now bid for the oil & gas blocks being offered by the ongoing NELP VI round with RPL. The two companies also plan to optimize various factors like marketing & undertake joint technology appraisal of the refinery, besides setting up a technology development centre in India.

Santanu Saikia, Executive Director of indiapetro.com, commented, "The best move for Chevron right now is to wait and watch." But on the contrary, analysts have recommended that instead of simply reserving the right to acquire another 24%, Chevron should go ahead and takeover RPL (as with an aggregate 29% of RPL shares, Chevron would become the single largest shareholder). With oil prices expected to cross $100 per barrel by the end of 2006, RPL's share prices are expected to surely rise beyond the current levels by significant levels; and buying 24% shares later would prove to be a much costlier affair! But, what seems to be groundbreaking is the fact that one just might be witnessing the beginning of the transformation of a truly Indian giant to a truly American entity.

(End of Nidhi Sharma column)