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. Last Updated: 07/27/2016

Mordashov Mulls New Arcelor Offer

ReutersArcelor chairman Joseph Kinsch briefing the media late Sunday after the company's nine-hour board meeting.
Severstal owner Alexei Mordashov on Monday appeared to be plotting his next move after his bid to become the biggest shareholder in Arcelor looked to have been trumped by rival Lakshmi Mittal.

Faced with a U-turn by the previously supportive Arcelor board, which voted unanimously to back Mittal Steel after a nine-hour meeting on Sunday, Mordashov offered no public response.

Spokespeople for Severstal noted the Russian steel firm was now "reviewing all options."

Following talks in the last few days between Mordashov and financiers Roman Zalenski and Jose Maria Aristrain, two of the biggest shareholders in Arcelor, Severstal is expected to announce yet another improved offer, a source familiar with the situation said late Monday.

With trading in Arcelor shares at five times the average daily volume on Monday, some investors said they suspected structures friendly to Mordashov were behind some of the deals.

The situation over Mordashov's $13 billion bid to obtain a one-quarter stake in Luxembourg-based Arcelor, which would make him its biggest shareholder, stirred political and business minds alike.

Russian politicians blasted the Arcelor board's reversal Monday as deliberate stunting of Russia's industrial growth, while in Europe many investors said they already sensed Mordashov's bid had failed.

And yet, as Mittal, Mittal Steel's majority owner and chairman, exulted at a Luxembourg press conference, the race to merge with Arcelor and create the world's largest steel company appeared to be not quite over yet.

"I would not say that Mr. Mordashov is out. I'd say he is in a difficult situation," said Francois de Rambuteau, a fund manager with Cholet-Dupont Gestion in Paris, which manages $2.3 billion in assets, including Arcelor shares.

Half of Arcelor's shareholder base still needs to vote down Severstal's offer at a June 30 meeting for it to be termed null and void. The shareholders will also vote on Mittal Steel's latest offer, which was improved to placate the anxieties of Arcelor's board and to attract shareholders with a bigger payout.

"Arcelor has probably extracted the best deal it could in the circumstances," said Stuart Fraser, an investment director for European Equities with Britain's Standard Life Investments, an Arcelor shareholder. "On initial numbers the new company looks good value to me and will remain a core holding in my portfolios."

Not all shareholders were as upbeat.

"I'm not sure it's interesting for investors to own Mittal shares," Cholet-Dupont's Rambuteau said. Mittal shares fell their farthest in over five weeks after Arcelor's board approved its offer.

Mittal's New Offer
Under Mittal's new offer, Arcelor shareholders would receive cash and shares in Mittal Steel worth 26.9 billion euros, or $33.7 billion. For each Arcelor share, an investor would get 1.08 Mittal shares plus 12.5 euros in cash, giving the Luxembourg company's stakeholders 50.5 percent in the new company.

Arcelor would also retain control of the board of directors -- nominating 12 of the 18 directors, including the chairman -- and on the management board. Arcelor would have four representatives, including the company's CEO, on the seven-member management board.

The Mittal family would have 43 percent of the new company and agree to cap its ownership at 45 percent of Arcelor in the future, according to a joint statement by Arcelor and Mittal Steel. The Mittals also agreed not to buy or sell Arcelor shares for five years, the statement said.

Mittal shares were as low as $29.70 in New York, down from $32.10 at Friday's close. Arcelor shares traded up 2.5 percent at 37.40 euros ($46.95) in Paris at 5:30 p.m. local time. Severstal's shares fell 2 percent to $10 in Moscow.

In such conditions, some Arcelor shareholders opted to sell shares on the open market, where a structure close to Mordashov could be a buyer, some investors said.

In the five months since Mittal launched his takeover bid for Arcelor, the company picked up just 0.2 percent of its Luxembourg rival's shares through an open-market offer. Now, since Arcelor's board has picked Mittal, the latter cannot openly scoop up shares on the stock market.

Meanwhile, Mordashov met with ABN Amro investment bank over the weekend seeking a credit line, Bloomberg reported.

A further helping hand could come from Roman Abramovich, the enigmatic owner of Chelsea Football Club with an estimated $18.2 billion fortune, Vedomosti reported Monday.

After buying a 40 percent stake in Russia's No.1 steelmaker, Evraz, last week, Vedomosti reported Abramovich was willing to lend money, or his Evraz stake, to sweeten Mordashov's offer.

A spokesman for Abramovich's Russian investment vehicle, Millhouse, said Monday that Abramovich and his partners were "just new shareholders in a major steel company" and had no further plans for the moment.

But a senior manager at a Russian steel company, speaking on condition of anonymity, cast doubt on Vedomosti's claim, saying Abramovich enjoyed closer ties to Mittal than to Mordashov.

A possible intervention by Abramovich has been discussed by Paris investors for some time already, as they suspect Abramovich's structures have already gained a stake in Arcelor.

On June 16, about 50 million Arcelor shares worth 1.7 billion euros ($2.1 billion) were traded -- 10 times the normal volume -- which led stock-market regulators to freeze all transactions. The French markets watchdog has yet to release the results of an investigation into the trading. "Some people in Paris guess that it might be Abramovich," Rambuteau said.

On Monday, when the trading resumed, a number of Arcelor's investors reported strong interest and sold their shares as 26 million shares worth $1.2 billion changed hands.

Francois Lenoir / Reuters

Lakshmi Mittal with his son Aditya, Mittal Steel CFO, at a briefing on Monday

Investors also cited Mittal's inability to resolve its dispute with Arcelor over the latter's recent acquisition of Canada's Dofasco steel company as some cause for concern in the two steel giants' merger. On Monday, Arcelor's board maintained its opposition to the sale.

Should Mordashov's merger bid fall through, he would receive 140 million euros ($176 million) in compensation. He also has some other options available.

The backtracking by the Arcelor board on what Severstal said in a statement was "a legal, binding merger agreement" could leave Arcelor open to litigation, some analysts said.

A merged Arcelor-Mittal could also spur on industry consolidation on terms favorable to emerging-market producers with ample raw materials such as Severstal.

Mittal and Arcelor together would account for 10 percent of the world's steel output. More importantly, they would control 30 percent of the steel market outside of China, which would increase price competition among steelmakers, said Rob Edwards, a metals analyst with Renaissance Capital.

First and foremost, this pressure would hit producers in developed countries. "Russian steel companies will be consistently competitive for a long time yet because of their low-cost production," Edwards said.

Cash-rich Russian and Brazilian producers would then be in a strong position to dictate further sector consolidations, analysts said.