Europe Has Way Too Much Money

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Last month, in a pair of columns, I argued the point that Europe has too much money. Last week, Luxembourg's Arcelor proved the point.

To return to the beginning of this story, on Nov. 23, Luxembourgian steel concern Arcelor -- by some metrics the world's second-largest steelmaker after Mittal (NYSE: MT), and by others the largest -- bid $3.7 billion to acquire Canada's Dofasco, a much smaller player in the steel market but one better positioned to sell product to U.S. automakers. Almost immediately, a two-party bidding war broke out, with Germany's steel champion, ThyssenKrupp, negotiating a friendly (as opposed to Arcelor's hostile) takeover deal. ThyssenKrupp's offer: $4.1 billion.

Of course, just as with a tango, it takes (at least) two to make a bidding war. On Friday, Arcelor agreed to play ball (have I confused the metaphor yet?) and raised ThyssenKrupp (how about now?) by $100 million. So the situation today stands as follows:

• ThyssenKrupp has the backing of Dofasco's board for a $4.1 billion friendly takeover.
• Arcelor has no such luck and is offering $4.2 billion.

Dofasco's board has, however, agreed to consider Arcelor's sweetened offer, which Arcelor has promised to keep open for 35 days.

I'd give you three guesses which way Dofasco will come down on the question, but I suspect you need only one. Its board has already agreed to ThyssenKrupp's original offer and publicly declared it a good deal for shareholders. Arcelor, on the other hand, arrived as an uninvited guest and never received Dofasco's endorsement of either its original or its follow-up offer. Plus, Arcelor did the international-business version of bidding a nickel over the winning bid on eBay -- beating ThyssenKrupp's offer by only $100 million. This suggests that Arcelor lacks the cash to go much higher.

A glance at the companies' balance sheet summaries on Capital IQ tells me the latter is most likely. Arcelor has $5 billion in the bank at present, plenty to do the deal. But it also has $5.1 billion in long-term debt. It would stretch the company's balance sheet awfully thin to pay much more for Dofasco (which has net debt of $240 million itself). ThyssenKrupp, in contrast, has $5.6 billion in cash and an equivalent amount in debt. It could therefore, theoretically at least, up its own bid and still keep a comfortable cash cushion on its balance sheet.

My bet: Dofasco takes its time responding to Arcelor's offer in hopes of an even richer counteroffer from ThyssenKrupp. And if none is forthcoming, it goes with the Germans anyway.

Missed Part 1 of this story? Read about it in:

• Arcelor's Arctic Boondoggle
• Europe Has Too Much Money

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Fool contributor Rich Smith has no position in any of the companies mentioned in this article.