Arcelor, Russian firm plan merger

Steelmaker's accord with Severstal could thwart Mittal takeover

May 27, 2006|By NEW YORK TIMES NEWS SERVICE

PARIS -- Arcelor announced plans yesterday to create the world's biggest steelmaker by merging with a Russian steel company controlled by the billionaire Alexei Mordashov, the latest in a series of high-stakes efforts to repel a hostile takeover bid from Arcelor's archrival, Mittal Steel.

Mordashov would become Arcelor's largest shareholder by paying cash and stock in his company, Severstal, for 32 percent of Arcelor. Mordashov also is offering a stake in all of Severstal's steel assets and an Italian steelmaker, Lucchini.

Based on its closing price Thursday, one-third of Arcelor would be worth 7.3 billion euros or $9.3 billion.

In an interview, Mordashov said he was contributing 1.25 billion euros in cash from his personal fortune to form "a company that is going to be by far the world market leader in steel."

For Arcelor, the participation of Mordashov appeared to represent an alternative to a takeover by Mittal, which is based in the Netherlands and is largely run by Lakshmi N. Mittal, a steel baron from India, and his family. Arcelor has battled hard against that bid, noting concerns about the way Mittal is managed. Arcelor also complained that Mittal's original bid of 18.6 billion euros undervalued the company. Mittal, which owns the Sparrows Point mill in Baltimore County, offered last week to raise its bid to 25.8 billion euros.

A merger with Severstal was "a much better choice for our shareholders," Arcelor Chief Executive Officer Guy Dolle said yesterday. "We are confident that they will support the Arcelor way."

Arcelor said its shareholders would "have the opportunity to express their choice about this transaction at a shareholders meeting."

The company also said the deal would go through by the end of July, unless more than 50 percent of shareholders were opposed.

A combined Arcelor and Severstal would be the No.1 steel company in the world, with sales of 46 billion euros and production of 70 million tons.

Mittal Steel said late Thursday that it was concerned Arcelor was attempting a "dilutive transaction" to "thwart" its deal. It did not rule out going forward with a takeover attempt, even if Arcelor sold a third of the company, said Wilbur Ross, a member of Mittal's board. "The question is, what does it do to value?" Ross said.

Mordashov, who has worked with Arcelor on joint ventures over the past decade, said serious talks on a share swap started four years ago.

Facilitator

"The Mittal bid was just the facilitator of this process," he said.

In exchange for his investment, Mordashov is to be a nonexecutive president, with the right to select six of the 18 Arcelor board members and to add Severstal executives to the management team. He said he would head a group to develop the companies' joint strategy in an increasingly steel-hungry global market.

"We very heavily underestimate the steel industry," Mordashov said. "We are probably at the beginning of a new cycle of the world economy, with the development of China and India and Brazil and Russia."

But Mordashov said he would not have an opportunity to vote directly against any decision by Arcelor shareholders to merge with Mittal because he would become a shareholder only after a vote on the deal, which is expected late next month. Only current Arcelor shareholders would vote on the Mittal deal, he said.

90 percent stake

Mordashov also agreed not to add to his stake in Arcelor for four years, and to keep his shares in the company for five years.

Mordashov owns 90 percent of Severstal and has a fortune worth $8.5 billion, according to Forbes magazine. The Severstal deal represents a premium of 100 percent on Arcelor's share price on Jan. 26, the day before Mittal Steel made its original bid.

Mordashov is eager to expand his steel empire abroad, and the deal could also become a tool to move some of his fortune out of politically volatile Russia. Severstal already is the most internationally oriented of the Russian steelmakers, with mills in Italy and the United States, where its subsidiary Severstal of North America took over Rouge Industries in Michigan in 2004 and is a supplier to Ford Motor Co.

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