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The Guardian: Arcelor merges with Russian steel group in final snub to Mittal’s €25bn bid

David Gow in Brussels
Saturday May 27, 2006
The Guardian

Arcelor, the pan-European steel group, yesterday torpedoed Mittal’s latest hostile takeover bid by buying Russia’s Severstal in an agreed 13bn euro (£8.8bn) deal designed to create an “unrivalled global champion” out of reach of its Indian-owned predator. The friendly transaction will see Alexei Mordashov, who owns 89% of Severstal, take 32% of the new group and, potentially, become its chief executive and even owner within a few years.

It is the biggest overseas industrial venture by a Russian company and was personally approved by President Vladimir Putin in an effort to persuade the increasingly sceptical west that Russia is “an open market and keen on globalisation,” according to Mr Mordashov.

It comes just a day after a Kremlin hawk warned western oil groups, including Shell and Total, that Moscow could renegotiate oil and gas contracts on Sakhalin island. The move could ease the way for Russian gas group Gazprom to buy its way into Europe. Gazprom has earmarked Centrica, owner of British Gas, as a key target.

The marriage, valuing Arcelor shares at 44 euros – more than 6 euros higher than Mittal’s 5bn euro offer late last week – was sealed at a five-hour Arcelor board meeting on Thursday. Guy Dolle, the chief executive, said it had been three years in the making but Mittal’s 17-week courtship had been a “catalyst”. The combined group will produce 70m tonnes of steel a year compared with 60m tonnes at Mittal – currently the world’s largest producer.Mr Mordashov, a billionaire oligarch who advises Deutsche Bank and French cement-maker Lafarge, said in perfect English that he was putting “all my wealth” into the new group – 11.73bn euros of assets and 1.25bn euros of cash. He gets 295m shares in “new” Arcelor in return.

Some analysts said the deal – billed by both parties as low-risk because of shared vision, values, strategy and personal friendship – was Arcelor’s final knock-out blow against Mittal which would be incapable of upping its offer, especially the cash element. Arcelor executives said they had yet to receive either Mittal’s latest offer – or his business plan, first requested three months ago.

But, as Arcelor shares fell to 34 euros, analysts at Commerzbank said the 44 euro valuation of the Severstal deal “has yet to be proved” and the entire transaction lacked transparency. Urging Arcelor shareholders to back Mittal, they calculated that the deal overvalued Severstal assets.

Daniel Broby, chief investment officer at Bankinvest, said: “I am totally amazed. Severstal isn’t a quality company. There’s no industrial logic. Effectively, the Arcelor board has secured, or is trying to secure, its future at the expense of shareholders. It’s just unacceptable.”

A Mittal spokesman said: “Arcelor’s shareholders are being forced to hand over control of their company whilst being denied a premium. Yet again the board appears to be manipulating its shareholder base to its own ends.” The group denounced in unusually strong language a provision in the Russian deal that requires a majority of Arcelor shareholders to veto it, calling it “unprecedented” and preventing investors from having a real choice in the company’s future.

“We don’t have any lessons to receive in democracy,” Mr Dolle riposted, insisting the board was empowered to go ahead without shareholder approval anyway. Investors will vote at an extraordinary meeting on June 21 on a proposed 7.6bn euros cash return to investors and, a week later, on the deal itself – in the face of a sparse attendance record.

Mr Dolle, who expects rapid regulatory clearance and completion in the second fortnight of July, has consistently attacked Mittal’s corporate governance record, including the family’s 88% control, as the main obstacle to a friendly takeover. Ignoring Mr Mordashov’s similar stake in Severstal, he insisted the combined group would remain a model company – with half of its 18 board directors independent.

Mr Mordashov, who will become non-executive president and has agreed to a five-year lock-up on his Arcelor stake, declared that Severstal – unlike most Russian privatised industrial groups – was an ethical model. “There have been no bad stories,” he added.

The oligarch, who has agreed to limit his voting rights, said: “It is very important for me to preserve the culture of both companies, developing special mechanisms to allow this company to be stable and not dependent on the subjective view of an individual and preventing anyone from having too much influence …”

Both executives said the industrial logic was to expand in emerging markets. Russia and Brazil will account for more than 40% of profits which are expected to jump to £10bn a year – before promised synergies of £590m.

Profile: Alexei Mordashov

The 40-year-old classic Russian oligargh Alexei Mordashov will be worth more than 10bn euros (£6.8bn) if the Arcelor deal goes through. He owns, directly or indirectly, 89% of Severstal and Forbes ranked him as the world’s 63rd richest person last year.

Armed with an MBA from Northumbria University and degrees from St Petersburg, he is a close ally of Vladimir Putin and advises on Russia’s industrial strategy, notably on its negotiations to join the World Trade Organisation.

He joined Severstal in 1988 and, as finance director from 1992, won control of the group in 1996 in the controversial privatisation programme initiated by Boris Yeltsin.

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