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. Last Updated: 07/27/2016

Arcelor Turns to Alexei Mordashov

APArcelor chairman Joseph Kinsch, left, and Alexei Mordashov talking at a Moscow news conference on Saturday.
Alexei Mordashov emerged as European steelmaker Arcelor's white knight on Friday, winning its approval for a merger with his Severstal metals business that would create the world's largest steel company -- and make him one of the industry's most influential players.

Under the $16.6 billion deal, Mordashov, 40, would become Luxembourg-based Arcelor's biggest shareholder, with a 33.2 percent stake, while Arcelor would acquire 89.6 percent of Russia's biggest steel company, plus mining assets and 1.25 billion euros in cash.

The merger, which is subject to approval by a June 28 Arcelor shareholders meeting, got the green light late Thursday from Arcelor's board in an effort to derail a hostile bid by its main rival, Mittal Steel.

Arcelor and Severstal combined produce 70 million tons annually, or 6 percent of the world's steel, including 22 percent of the steel for the car industry worldwide, the companies said Friday.

That would put the merged company ahead of Mittal, which produces 60 million tons annually, they said.

Top Russian officials, including Finance Minister Alexei Kudrin, hailed the deal as proof of the country's emergence onto the world economic stage, while Mordashov's fellow steel tycoons Alexander Abramov and Alisher Usmanov on Friday hinted that further industry mergers could be in the offing.

Mittal Steel, the world's biggest steel producer, warned that the celebrations could be premature. Lakshmi Mittal, the company's CEO and majority shareholder, branded Mordashov's offer "second-class," and insisted Saturday that his bid remained in force.

Earlier this month, Mittal Steel increased a previous offer for Arcelor by one-quarter to 25.8 billion euros ($33 billion). Arcelor has repeatedly rejected Mittal's advances, only agreeing to review its bid last week under intense pressure from shareholders.

Arcelor is 81.5 percent owned by investment funds, with the rest divided between the governments of Luxembourg, Belgium and other West European countries.

London-based Mittal Steel is controlled by the Mittal family.

Under the Mordashov deal, his Severstal Group steel and mining assets -- valued at 13 billion euros ($16.6 billion) would be transferred to Arcelor, as well as 1.25 billion euros in cash. Mordashov would raise the money through a bank loan. In return, he would receive 295 million new shares in Arcelor, leaving the firm's current shareholders with 67.8 percent in the new company.

Steel and mining account for 80 percent of Severstal Group's annual $11.7 billion turnover. As well as Severstal's Russian steel business, it brings to the deal its U.S. steelmaker Rouge Industries; Italy's No. 2 steelmaker, Lucchini; hardware and wire producer Severstal-Metiz; and the coke and iron-ore assets of Severstal Resources. Mordashov controls 89.6 percent of Severstal and 70.8 percent of Lucchini.

Mordashov would retain his carmaker Severstal-Avto, stakes in four ports and plywood, banking and insurance assets.

Under the deal, Mordashov would become nonexecutive president of Arcelor's board and have the right to nominate six out of 18 board directors. Under the company's rules, half the board's directors must be independent.

Arcelor chairman Joseph Kinsch and CEO Guy Dolle would keep their posts, while the rest of the management team would "remain in place, supplemented by Severstal executives," the companies said in a statement.

The two companies expect to save 590 million euros ($750 million) from synergies and "potentially more from capital expenditure" thanks to the merger, as well as gain a strong presence on emerging and mature markets, the statement said.

Arcelor's board picked Mordashov over several other candidates, including rival Russian steel magnate Vladimir Lisin, due to "a record of close cooperation in several joint ventures and established trust," Dolle said in a Friday conference call to investors.

Alexei Boitsov / Bloomberg

A steelworker gesturing to control the pour at Severstal's Cherepovets plant.

Mordashov said he saw a long-term future in the merger and was happy to invest his assets and cash in the deal. "I do believe in this very much," he said several times during the conference call.

Under the deal, Mordashov cannot sell more than 5 percent of his Arcelor stake for four years or acquire new shares for five years after the transaction is completed.

In contrast to Mittal's bid for control of Arcelor, Mordashov will likely be a more pliable ally -- yet one with significant political clout.

Mordashov is a member of the country's most powerful business lobby, the Russian Union of Industrialists and Entrepreneurs, which periodically meets with President Vladimir Putin in the Kremlin.

In a sign of his close ties to the Kremlin, Mordashov was a prominent member of Putin's campaign team in the 2004 presidential election.

He has been a key proponent of Russia's bid to join the World Trade Organization and lobbied the EU to ease export quotas for Russian steelmakers.

The Kremlin may have backed the Mordashov-Arcelor deal as a way of protecting Russian producers against Mittal, which already has plants in Ukraine and Kazakhstan.

Friday's announcement came a day after Putin met with EU leaders, including European Commission President Jose Manuel Barroso, at his residence near the Black Sea resort of Sochi. Some European officials have raised concerns about Mittal's bid for Arcelor, saying it might jeopardize jobs in France and other countries.

A week before the Arcelor deal was announced, Mordashov also met with Putin at his Sochi residence.

On Friday, Mordashov denied that he had sought the president's approval on the merger deal, while a spokeswoman for Severstal said the two had mostly discussed the supply of wide-diameter steel pipes to Russia's oil pipelines and social projects at the Sochi meeting.

"Severstal is a private company. It's up to the shareholders to decide its course," Mordashov said. But he added that "we have talked about the deal with many people" and he felt the reaction from the authorities was "very positive."

The Luxembourg news conference, however, began with Arcelor's Kinsch giving a nod to the Russian authorities.

"I'm glad to see that the Russian ambassador is here. He's a friend," Kinsch said.

Mordashov said in his conference call that the bid proved that "Russia is an open country" and Severstal's case would be a precedent for more international mergers as "many Russian entrepreneurs want to become global."

At a second news conference with Arcelor executives in Moscow on Saturday, Mordashov said Severstal would retain its brand. "It will remain a Russian company and will pay its taxes in Russia," he said.

U.S. banking giant Citigroup said Friday that it might upgrade the Russian steel sector's rating as the deal indicated political risks were being overplayed.

The bank's former advice to clients that the Russian metals and mining sector was off-limits to global players "was probably erroneous" and will be reviewed, Citigroup said in a report.

Andrei Litvin, a metals analyst at MDM Bank, said Mordashov's example could prove the key to long-expected consolidation in the Russian steel industry. "The sector is very closed right now" due to personal differences between leading steel companies' majority shareholders, Litvin said.

Mordashov insisted on Friday that his acquisition of the Severstal steel plant through a 1992 privatization and his subsequent running of the business were fully in line with the law.

"It's really a very simple story. Everything was done absolutely legally," Mordashov said, explaining his meteoric rise.

Mordashov's involvement with Arcelor began in February 2002, when the two companies set up a $210 million joint venture to produce galvanized auto steel. The Cherepovets-based venture, Severgal, has an annual capacity of 400,000 tons and sells to carmakers Ford, Renault, Toyota and AvtoVAZ. Severstal holds 75 percent in the venture. A second joint venture, wire producer Trefilarbed Rus, followed last year.

The support of Arcelor's directors may not, however, be enough to clinch the deal if shareholders vote in favor of the Mittal bid.

Stuart Fraser, investment director for European equities at Standard Life Investments, which holds 0.6 percent of Arcelor's shares, said Mordashov's offer had "at first glance" some robust industrial logic. He added, however, that the fund would be happy to "critique both offers."

Stock market reaction to Friday 's deal was mixed. At the close of trading Arcelor's shares were down 3 percent at 33.05 euros ($42.10) in Paris, while Severstal's Moscow-listed shares gained 4.8 percent to end at 1,495 rubles ($55.28). All three major ratings agencies said Friday that they would consider upgrading Severstal.

Analysts warned against viewing the Arcelor-Severstal link-up as a done deal and predicted an improved bid from Mittal. "This deal could be Arcelor showing Mittal how much it wants to be offered," Litvin said. Mittal's offer values Arcelor's shares at 34 euros each, 20 percent less than in Mordashov's bid.

Mittal Steel may now alter its bid to buy only 51 percent in Arcelor, Pravin Banker, an adviser to the Mittal family, said Friday. If Mittal succeeds in acquiring 51 percent of Arcelor after a merger between Arcelor and Severstal, the former merger will be annulled, according to the terms of Mordashov's deal.

Banker said the actions of Dolle and Arcelor's board had been anticipated by Mittal. "The actions leave Arcelor's directors open to individual lawsuits in the European Union or the United States for violation of their fiduciary duty and a disservice to shareholders," Banker said via e-mail.

Some analysts said the Mordashov deal would not add any value to Severstal Group's companies or their minority shareholders.

"Minority shareholders in Severstal are unlikely to win out in this merger," said Alexander Branis, manager at Prosperity Capital fund, which manages $2.5 billion. "I don't see the logic for Mordashov either. Arcelor mostly works on mature markets that grow slower," whereas Russia is an emerging market, Branis said.

If more than 50 percent of Arcelor shareholders vote against Severstal, Dolle said Mordashov's offer would be rescinded and he would be paid a break-up fee of 140 million euros.