Arcelor moves to block Mittal with tie-up

Luxembourg: Arcelor has agreed to buy Russia's Severstal to create the world's biggest steelmaker, in a €13 billion ($16.6 billion) deal that would thwart Mittal Steel's hostile bid for the Luxembourg-based group.

Arcelor, now the second-largest steelmaker behind Mittal in volume, said on Friday that the enlarged group would be the industry's most profitable, with 40 percent of its core earnings in the lucrative Brazilian and Russian markets.

Arcelor Chief Executive Guy Dolle said the link-up, announced just a week after Mittal improved its offer, had been more than three years in the making, although Mittal's unwelcome advances had been a catalyst.

"We have been courting for a long time. Now it is time to be engaged to be married," Dolle said.

He expected the plan to be put to Arcelor shareholders at a meeting provisionally on June 28 and to receive the support of a majority.

In order to reject the deal, a majority of shareholders would have to vote against it.

Severstal Chairman Alexei Mordashov, who owns 89.6 per cent of the Russian group, is to provide €11.73 billion worth of assets and €1.25 billion in cash for new Arcelor shares issued at 44 euros each, for a stake in the new Arcelor of 32 percent.

French Finance Minister Thierry Breton, who has voiced opposition to Mittal's bid, told reporters in the Chilean capital of Santiago that the Severstal transaction was a "friendly" deal. Breton added he would ask questions about the transaction when industrial plans were made available.

Transparency

Dolle said that 44 euros represented the real per share value of Arcelor, although the company's shares ended Friday trade at €33.05, down 3 per cent on the day.

Commerzbank said in a note that Mittal-Arcelor would be a superior combination and Mittal's offer was more attractive.

"Arcelor says this deal values (it) at €44 per share, but this has in our view yet to be proved.

There is no real transparency on the value of the assets to be integrated into Arcelor, as only one part of them is listed," it said.

"We continue to recommend to tender Arcelor shares to Mittal."

Stuart Fraser, investment director for European equities at Standard Life Investments, said of the Russian deal:

"I think it adds more value to Arcelor shareholders in the medium term than the current Mittal offer. But that depends on the transaction actually going through, the share buybacks taking place and synergies being recovered."

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Standard Life has about 0.6 per cent of Arcelor.

Severstal was valued by the transaction at €13 billion, Mordashov told a conference call.

Its shares rose 15 per cent to 379.50 roubles on Russia's MICEX exchange .

Mittal Steel's existing bid offers one Mittal share and €11.10 in cash for every Arcelor share and values Arcelor around €23 billion ($29.4 billion).

"Arcelor's shareholders are being forced to hand over control of their company, whilst being denied a premium," a Mittal spokesman said.

The company also said it was not considering raising its offer again. Mittal's shares ended up two per cent at €25.00.

Global Consolidator

Dolle told a news conference that the Arcelor-Severstal combination would aim to be an industry consolidator and would be armed with a solid balance sheet.

Analysts said the deal could also trigger a long-awaited consolidation of Russia's steel industry, where powerful owners have been reluctant to share the spoils of acquisitions made during Russia's economic turmoil of the 1990s.

"It sends a message that Russian steel makers are in play," said Michael Kavanagh, metals and mining analyst at MDM Bank.

Mordashov discussed his steel industry record at a news conference, saying he had always played by the rules even during turbulent times.

The price he was willing to pay for Arcelor, he added, was a reasonable six times core earnings.

Arcelor and Mittal have been engaged in a war of words since Mittal made its first move to buy its rival in January.

Arcelor dismissed Mittal's initial bid as inadequate and sought the loyalty of its shareholders by offering them a 5-billion-euro share buyback and an increased dividend.

Under the agreement with Severstal, Mordashov will contribute all of his economic interests in Severstal and Italian steelmaker Lucchini in return for Arcelor shares.

The combination, expected to be finalised in July, would hold more than 20 per cent of the automotive steel market.

Arcelor said it would be accretive to earnings as early as 2006, before synergies, which it estimated at 590 million euros per year.