The battle for Arcelor

24 April 2008

The Board of Arcelor, the world's largest steel producer, announced plans to takeover Severstal, Russia's largest steel company on May 29. If the deal is approved by Arcelor's shareholders, it will see Alexy Mordashov, Sverstal's controlling shareholder acquire a 32% interest in the new group.

Under the terms of the deal, this would give Mr Mordashov six places on Arcelor's 18-seat Board. However, it has been agreed that Mr Mordashov will vote his shares in accordance with the Board's wishes for the first four years following the merger, and that he will not sell any Arcelor shares for five years.

This would effectively block Mittal Steel from acquiring Arcelor, which it has been trying to do since January 29 through a hostile bid. May 21 saw Mittal increase its offer, but this was followed five days later by Arcelor's announcement of the proposed Severstal merger.

The revised Mittal bid offers Arcelor shareholders a choice of cash, shares or a mixture of the two. The cash offer is for € 37,74 per share, but the pure share swap - 17 Mittal shares for 12 Arcelor shares - would value the company at € 41,5 per share, based on Mittal's average share price in May.

The Severstal deal values Arcelor's shares at € 44 each - double their value on the day before Mittal Steel launched its initial hostile bid. Under the terms of the agreement, Mr Mordashov would transfer his controlling interest in Severstal, along with his minority interest in Italian producer Lucchini to Arcelor, along with € 1,25 billion in cash. In exchange he would receive 32% of the enlarged group, made up of 295 million newly issued shares. Arcelor would then return € 7,6 billion to shareholders via dividends.

The acquisition requires approval from shareholders representing more than 50% of Arcelor's voting rights. While it would appear the Severstal transaction represents a higher valuation of Arcelor, the fact that it is predominantly a share swap means this valuation is based Severstal's asset value. Mittal Steel controlling shareholder, Lakshmi Mittal, has been quick to state his view that Severstal has been over-valued, and therefore overstates the value of the deal.

Mittal is the world's second largest steel producer behind Arcelor, with revenues last year of US$ 28,1 billion (€ 21,9 billion) and an annual production of 49,2 million tons (44,7 million tonnes). This compares to the Luxembourg company's € 32,6 billion revenues and 46,7 million tonnes of crude steel production. Severstal meanwhile has annual revenues of € 13,2 billion and a production capacity of 17,1 million tonnes.

Either merger would create a clear number one in the steel industry. If the Severstal deal goes ahead, the enlarged group will have annual revenues of about € 46 billion and production capacity of 70 million tonnes. The Mittal acquisition would create a larger group, with revenues of € 69 billion and production capacity of 91 million tonnes. According to Arcelor, world steel production last year was 1,13 billion tonnes.

However, the two deals would create companies with significantly different footprints. The Arcelor-Severstal group would be number 1 in Europe, Russia and South America, with a strong position in North America. Mittal also has a presence in North America, but the group has a much more noticeable footprint in the emerging markets of Eastern Europe, Asia and Africa.

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