Arcelor Bows to Improved $33 Billion Mittal Offer

Arcelor SA yielded to a sweetened bid from Mittal Steel Co. (MT) on Sunday, ending a bitter five-month takeover battle in a deal to create a steel titan with nearly 10 percent of the global market.

After a nine-hour session, Arcelor's board supported the proposal to create Arcelor-Mittal — a bid that was a 10 percent improvement on the previous offer, said Arcelor Chairman Joseph Kinsch. That would make it worth about 26 billion euros ($33 billion).

Since Mittal launched its surprise bid in January, Arcelor has wrung several changes out of the company, retaining a considerable level of control. Shareholders are to make their choice Friday in a vote that could seal the deal, which Mittal has now raised twice.

"Intense discussions with Mittal Steel in the past weeks have resulted in a significantly improved offer by Mittal Steel that the board of directors is unanimously recommending," Kinsch said in a statement. "The merger will give rise to the leading steel company in the world."

By capitulating to Mittal's bid — which Arcelor had resisted since January — the company snubs suitor OAO Severstal, which had improved its own merger offer and had earlier been favored by the board.

The Russian company, which now looks to be in line for a 140 million euro ($175 million) break-up fee, will have a "privileged" status and the combined Arcelor-Mittal will maintain joint ventures, Arcelor said.

Severstal reacted furiously, saying it was "very surprised" Arcelor's board did not invite it to discuss its revised offer or give it the chance to respond. "We are now reviewing all of our options," it said, pointing out that it had acted in good faith since it signed a "legal, binding merger" last month.

Analyst Georges Ugeux, chairman and CEO of Galileo Global Advisors, said Severstal's controlling shareholder Alexei Mordashov was a "wild card" who could make a counter bid.

Mittal told shareholders it was "critical" that they vote their shares against the proposed Severstal combination, but said it was "delighted" with Arcelor's decision.

"This is one of the greatest days in the history of Mittal Steel and a seminal event in the steel industry that will shape its future," said Mittal Steel Chairman and CEO Lakshmi Mittal.

Mittal will pay 40.40 euros ($50.51) a share, Arcelor said. That would be a 15 percent premium over its price of 35.02 euros ($43.78) in Paris on Tuesday, when shares were suspended and a 49 percent improvement on Mittal's first unsolicited offer on Jan. 27.

The Mittal family, which currently holds 87 percent of Mittal Steel, will own 43.6 percent of the combined group and agree not to make any major changes to their stake for five years. Mittal will bow to both Arcelor's business plan and its corporate governance, backing off an earlier demand for the Mittal family to have at least 51 percent of the combined group.

Mittal will pay a maximum of 8.5 billion euros ($10.63 billion) cash, it said.

"The egos have been replaced by a reasonable discussion on the transaction," Ugeux said.

The new company would dwarf other steelmakers, controlling close to 10 percent of world steel production, churning out 120 million tons of crude steel a year and employing more than 320,000 people. It would have a market capitalization of $46 billion (36.79 billion euros) and save $1.6 billion (1.28 billion euros) in synergies, Mittal said

Analysts have said the two companies are complementary and have few overlaps. Arcelor — based in Europe with large operations in Latin America — focuses on high-quality steel, selling to long-term clients in the auto industry in Europe. Mittal's steel mills in Asia and Eastern Europe produce lower-quality steel sold on the open market, although it also has significant operations in North America through its acquisition of ISG.

Arcelor's about-turn comes after it rejected two of Mittal's earlier cash-and-stock offers as undervaluing the company. It favored a "friendly" deal with Severstal that, linked with Arcelor's plan to buy back up to a quarter of its shares, was seen as a defense against Mittal.

Kinsch, 73, will initially be chairman of a Luxembourg-based Arcelor-Mittal, while Lakshmi Mittal, 55, will serve as president. Mittal will become chairman when Kinsch retires. Arcelor Chief Executive Guy Dolle — who once described Mittal's steel as cheap eau de cologne compared to Arcelor's fine perfume — will keep his post on the board. Mittal Steel's chief financial officer, Aditya Mittal, will also sit on the management board.

Arcelor will nominate four members of the management board, with Mittal naming three. Arcelor shareholders will also get 50.5 percent of the new company's share capital, but will own 60 percent by value.

The Luxembourg steelmaker said it was still opposed to selling off Canadian steelmaker Dofasco Inc. It ring-fenced its recent purchase by passing control to a Dutch trust to prevent Mittal from following through on a plan to sell it to Germany's ThyssenKrupp AG.

Mittal says it has no need of an extra North American steel business.

"Arcelor and Mittal have not been able to reach agreement as to the ultimate disposition of the Dofasco Group," Mittal Steel said. "Discussion of this question will continue following successful completion of the tender offer."

Mittal owned 0.2 percent of Arcelor by June 22, the Spanish market regulator said, and needs at least half the company for its bid to succeed.

The haggling inflated Arcelor's share price well above its level of 20.95 euros ($26.19) at the end of 2005. In its buyback, Arcelor valued itself at 44 euros ($55.01) a share.