European takeovers. Powerless patriots

European politicians cannot do much to stop Mittal Steel's bid for Arcelor

DOMINIQUE DE VILLEPIN, the French prime minister, remained conspicuously silent in the first days after his government was surprised by the news of Mittal Steel's hostile bid for Arcelor, a European steelmaker, with almost 30,000 employees in France. On January 31st he broke his silence in a televised address with a call to arms. "Economic patriotism is the mobilisation of all the participants, of all those concerned, the shareholders but also the company bosses," he said, urging French and other European chief executives to be better organised to resist attacks by foreign companies.

Thanks to France's increasingly protectionist mood, corporate takeovers are a sensitive topic in Europe. Last week Charlie McCreevy, the internal market commissioner of the European Union, sent Thierry Breton, France's finance minister, a letter demanding justification for provisions in new legislation that gives the government the right to veto or impose conditions on takeovers in 11 industries. If he is not happy with Mr Breton's reply, due before the end of this month, the commissioner will take legal action.

The Brussels reprimand might explain the initially subdued reaction to Mittal's bid by French politicians. With the exception of Mr Breton, government ministers are, reportedly, under gagging orders from Mr de Villepin who wants to avoid the embarrassment of another Danone affair. Last July French politicians of all political persuasions rushed to defend Danone, a French food firm, against a rumoured takeover bid by PepsiCo, a big American food firm. The Americans never made an offer, but France's shaky reputation as a welcoming place for foreign investment suffered another blow.

Mr Breton is at pains to argue that he is not opposed to hostile takeovers, he is not a protectionist and he is certainly not anti-Indian. The finance minister says that his main complaint is Mr Mittal's lack of respect for business etiquette. As a former chief executive of France Telecom and Thomson, two blue-chip French companies, he says, he is familiar with the rules of international business. "I have done many deals in my life, but I have never seen such lack of preparation for an operation of such size," says Mr Breton. He thinks there is no industrial point to the merged company. The bidder just thought that "big plus big makes very big".

The French government clearly considers Arcelor one of the country's corporate jewels, but it has very little standing in the matter--it is neither a shareholder nor regulator of Arcelor. The company, created in 2002 after the merger of Spain's Aceralia, Luxembourg's Arbed and France's Usinor, is incorporated in Luxembourg. It has employees in Spain, Germany, Luxembourg and the Americas, as well as France. As the world's biggest steel company in annual sales and the second-biggest by volume, it is--together with Sanofi-Aventis, a Franco-German pharmaceutical firm, and the European Aeronautic Defence and Space Company--one of the few pan-European corporate success stories.

All the French government can do to try to make the bid fail is to influence other stakeholders and shareholders. Jean-Claude Juncker, the prime minister of Luxembourg, which owns 5.6% of Arcelor shares, has predictably fallen into line with France--declaring that in the next few weeks he will do whatever it takes to make the deal fail. The government of Wallonia, a French-speaking region of Belgium that owns 3.2% of Arcelor, has made similar noises. Union leaders have begun to fret about workers' social protection under the Mittal regime and possible job cuts.

But the only real legal obstacle to a deal could be intervention from the competition watchdog in Brussels. Yet competition lawyers say almost unanimously that the merged company would not pose an antitrust problem. The geographic presence of the two companies is complimentary: Arcelor is strong in Europe; Mittal is big in America. Together, they would control only around 10% of the world market for steel.

While the commission claims exclusive competence in competition matters, the French government, or any other government involved, could block the deal on non-competition grounds. According to EU rules member states can stop a takeover if it threatens the plurality of the media, public security or the country's financial system, or if it involves dirty money. But there is precious little sign of such a threat from a big steel merger.

Could the French government use the much-criticised decree on protected industrial sectors against the bid? Steel is not on the list of sectors. They are all related to the defence industry, with the exception of gambling. But Mr Breton may be hoping to raise such a squawk that Mittal chooses to back off. The French finance minister argues that a hostile government and hostile stakeholders can ultimately scupper a deal--citing the example of the bid by CNOOC, a Chinese firm, for Unocal, an American oil company; an offer that was ultimately withdrawn by CNOOC itself, in the face of a ferocious political backlash in the United States.

European politicians cannot do much to stop Mittal Steel's bid for Arcelor.