The Economist 07Dec2019

The EconomistDecember 7th 2019 Business 67

1

L

akshmi mittal has grown his com-

pany, ArcelorMittal, the world’s biggest

steelmaker, through a series of deals across

the world. Some, like the mega-merger in

2006 with Arcelor, then Europe’s largest

steel producer, were tough. Perhaps none

has given Mr Mittal as much grief as the

takeover of a massive steel mill in Taranto,

in southern Italy. The bureaucratic and le-

gal troubles, combined with a horrible

market for steel, last month led Mr Mittal to

walk away from the deal he struck with the

Italian government a year ago.

Under that lease-and-purchase agree-

ment ArcelorMittal agreed to buy Ilva, Eu-

rope’s biggest single-site steel firm, for

€1.8bn ($2bn) and to invest another €2.4bn

in cleaning up and modernising a plant

dogged by charges of corruption and envi-

ronmental crime. It agreed to pay €45m a

quarter for 18 months to lease the facility, to

be deducted from the purchase price. “Mit-

tal saw an opportunity to turn around a

very badly managed plant,” says Jason Fair-

clough of Bank of America Merrill Lynch.

The deal would make his company the

strongest in south-eastern Europe.

The timing was poor. Steelmakers

everywhere face falling demand from Chi-

na and a 40% increase in the price of iron

ore in the past 18 months. Those in Europe

additionally have to contend with reduced

appetite for high-quality steel from Euro-

pean carmakers and a 70% rise in the price

of eu emissions-trading permits since

mid-2018, a big deal for a carbon-belching

industry. President Donald Trump’s tariffs

have also made Europe the dumping

ground for steel from Russia, Turkey and

other countries that would otherwise have

gone to America.

Even so, ArcelorMittal expected Ilva to

break even this year. Instead, it will lose

more than €1bn. The real trouble started

this summer. Rumours surfaced that the

Italian government might strip Ilva of legal

protection from criminal prosecution over

environmental liabilities. The government

had introduced a legal shield, valid until

the end of 2023, when it nationalised Ilva in

2013 after seizing more than €8bn in assets

from the Riva family, the previous owners,

amid allegations by prosecutors of finan-

cial fraud and environmental crimes. (The

Rivas deny wrongdoing.) In 2012 Italian au-

thorities ruled that emissions of dust and

chemicals from the plant had caused

deaths, tumours and respiratory disease.

Taranto still occasionally declares a “wind

day”, on which schools near the plant close

to avoid exposure to dust from open-air

mineral deposits.

On November 3rd Italy’s government

indeed revoked Ilva’s legal immunity

through new legislation. The next day Ar-

celorMittal sent three state-appointed ad-

ministrators a withdrawal notice stating its

contractual right to walk away from the

agreement if a new law were to “materially

impair” its ability to operate the plant or

implement its turnaround plan. “The legal

protection was a prerequisite for the deal,”

says Paul Weigh, a spokesman for Arcelor-

Mittal. The company is also incensed by

the government’s demand that it turn off

one of three blast furnaces in Taranto in

December, which will considerably reduce

its output.

The revocation was engineered by the

Five-Star Movement (m 5 s), an anti-estab-

lishment party with strong roots in the

south that governs in coalition with the

centre-left. Its members had long cam-

paigned for the closure of the plant while in

opposition. Having initially backed the le-

gal shield, they then supported ditching it.

Giuseppe Conte, the centre-left prime

minister, wants Ilva to survive. It employs

10,700 people directly, and indirectly as

many as 60,000—most of them in Puglia, a

poor region in Italy’s heel. The government

is in talks with the Mittals to rescue the deal

before a court hearing on December 20th.

Mr Mittal and Mr Conte may yet come to an

agreement to restore the legal shield.

If the talks fail and the case goes to court

the government will prop up Ilva with

emergency loans to protect jobs. The gov-

ernment’s shabby treatment of someone

willing to pour billions into one of its poor-

est regions is unlikely to encourage other

bids. In the meantime, Italy’s battered rep-

utation with foreign investors has suffered

another dent. 7

The saga of the Ilva steel mill sends a

chill down foreign investors’ spines

Italian steel

Trouble in Tartano

Marred by dirty tricks

T

his augustAndrew Cohen, boss of Bel-

lamy’s Organic, an Australian maker of

infant formula, enthused to investors

about having a brand “that’s loved in Chi-

na”. So loved, in fact, that a few weeks later

Mengniu Dairy, China’s second-biggest

producer of milk products, said it wanted

to buy Bellamy’s for A$1.5bn ($1bn). On De-

cember 5th its shareholders voted in favour

of the deal.

At first Bellamy’s seemed to be milking

it, not Mengniu. An Australian government

committee that reviews foreign acquisi-

tions set out conditions: Mengniu must

keep headquarters and most of the board

Australian, and pour A$12m into local fac-

tories. Mengniu offered a 59% premium on

the firm’s share price, which had shed

three-fifths in the 18 months before the of-

fer (it has rebounded a bit since). Mr Cohen

blamed falling Chinese birth rates, a regu-

latory hold-up on imports and competition

in China’s thirsty infant-formula market.

Now Mengniu looks like the cat that got

the cream. It wasted no time in making an-

other bid on November 25th to buy Lion

Dairy & Drinks, Australia’s second-largest

milk processor, for A$600m. The pair of ac-

quisitions would hand it a rich vat of or-

ganic and premium brands that China’s

middle class covets, including Farmers Un-

ion yogurt and licences to the Yoplait fran-

chise. Mengniu can tap high-quality Aussie

milk. And it is one in the eye for Yili, its big-

ger cross-town dairy rival in Hohhot, the

SHANGHAI

A milk colossus gulps down two

Australian producers

Chinese dairy

Cow cash