Arcelor opposes merger with Mittal as it could damage its market position, but analysts say that industry giants share similar approach to business.

As Mittal Steel and Arcelor square up for their increasingly argumentative takeover battle, steel industry analysts are trying to decide which company may have the advantage in terms of its ability to compete against other steel businesses during the next decade. Such a judgment is difficult, given the contrasting styles of Mittal and Arcelor - currently the biggest and second-biggest players in the steel industry by volume - and their heads.

As Mittal Steel travelled the corporate and political courts of Europe this week, putting its case and trying to charm potential opponents, Arcelor launched a dogged defence of its position on political and business grounds.

Mittal has proposed an €19.8 billion takeover of its Luxembourg-based rival to make a combination that would make more than 100 million tonnes of steel a year and be three times bigger than its next three competitors combined.

Guy Dollé, chief executive of Arcelor, has vigorously opposed the takeover, arguing that his company is performing well by itself.

He says that a change of senior management would destroy years of work in building up the company's market position, particularly in high-grade areas of steel, and would be bad for shareholders.

Most onlookers agree with Dollé that the two companies have very different cultures.

"Mittal is focused on making commercial-grade products, while Arcelor is a very technical company, geared more to producing a higher-value type of steel," says Rod Beddows, chief executive of HB Advisers, a London-based finance group for the metals industry.

But does this matter?

"If you look at the steel industry in the past, the people who have done best are often the ones who have constructed mills on the cheap and worked their way up, rather than the companies who have the fanciest products," says Charles Bradford, of Bradford Research, a US consultancy. Mittal has been built up by Lakshmi Mittal, its chairman and main owner, through numerous acquisitions, many of them in low-wage nations, over the past 20 years. Arcelor was formed in 2001 from a combination of three established European steel companies: Usinor of France, Luxembourg's Arbed and Aceralia of Spain.

While Mittal has had a publicly quoted arm since 1997, Mittal has operated for most of his career in the manner of an entrepreneur untrammelled by the rules and practices of stock markets. Only since February 2005 has Mittal had a large presence as a listed public company, with shares traded in Amsterdam and New York, but even now his family still owns 88 per cent of the company.

Dollé argues that the small "free float" - which, if the bid succeeds, would be increased to 49.3 per cent, with the Mittal family holding the rest - is bad for corporate governance because a small group of shareholders can effectively control the business. Richard Brakenhoff, an analyst at Rabo Securities, a Dutch investment group, has another view.

"If one person holds so much of the company and his own money is at stake, is he likely to do crazy things? Probably the answer is no."

Michael Sones, ABN Amro investment group, says that the high stake in Mittal by one shareholder would, by itself, probably not dissuade investors from putting their money into the company, especially given Mittal's good track record. In terms of a corporate vision, both Mittal and Arcelor have tried to pioneer a new approach in the steel industry through taking over smaller competitors in order to build up global volumes.

But Mittal has been far more active, for instance by the acquisition of steelmakers in eastern Europe, Kazakhstan and Mexico that Arcelor and its predecessor companies were not interested in. Arcelor in contrast has made much more headway in South America, where Mittal is not present, through steel acquisitions in Brazil.

The latest figures from both companies are not too dissimilar. In the first nine months of 2005, Mittal had sales of $21.6 billion (€17.9 billion) and earnings before interest, tax, depreciation and amortisation (Ebitda) of $4.4 billion, for a margin of 20.3 per cent. While Arcelor's revenues for the same period were €24.2 billion, giving the company an edge in sales terms, its Ebitda for the nine months was €4.5 billion, giving it a margin slightly lower than Mittal's of 18.5 per cent. Few differences stand out between the companies' share performance.

Since Mittal was formed in late 2004, its shares have dropped against an index of global steel stocks by 30.7 per cent, as against Arcelor's outperformance on the same measure of 13.6 per cent.

However, Arcelor's record on the same basis since its establishment in 2001, since when steel stocks generally have risen fourfold, has been far from impressive. Its shares have dropped since this date by 16.7 per cent, compared with the global steel index. That underlines that, as shareholders weigh up the two companies' records, separating them will not be easy.

- (Financial Times service)