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Investors Revolt Against Severstal

Arcelor shareholders dumped Severstal owner Alexei Mordashov's offer at a Friday meeting in Luxembourg -- with not a single shareholder voting in favor of his merger bid.

The shareholder revolt, a little over a month after Arcelor's board backed the Severstal offer, represents a dramatic setback for Mordashov's ambitions to become a major player in the global steel industry. It is also a rebuff of his public relations campaign, which appeared to be outclassed by Mittal's more sophisticated appeal to shareholders.

The vote against Severstal's bid, by 97.6 percent of shares represented at the meeting, paves the way for Arcelor to merge with Mittal Steel to create a steel giant with a capacity of more than 100 million tons per year -- three times bigger than its nearest rival.

The only sign of any shareholder qualms about rejecting Mordashov's offer were the ballot papers for 2.4 percent of shares that were turned in blank.

The meeting came five days after Arcelor's board dropped its opposition to Mittal, which first announced a takeover bid five months ago.

By Sunday, Mordashov appeared to have dropped any thought of plans for a last-ditch bid to buy Arcelor outright. Instead, he was reported to be planning a sale of up to one-quarter of Severstal shares, worth 3 billion euros ($3.8 billion), in London later this year, The Business reported, citing a banker familiar with the situation. Mordashov will not consider further transactions with European steelmakers until after the share sale, The Business said.

At Friday's meeting, shareholders representing nearly 58 percent of the company voted against Mordashov's offer. A total of 60.4 percent of shares were represented at the meeting, more than the 50 percent needed to reject the deal.

"Seeing this vote, the board will now unwind the agreement with Mr. Mordashov," Arcelor chairman Joseph Kinsch told shareholders after the vote.

Mittal Steel will now have until July 12 to collect pledges from more than 50 percent of Arcelor shareholders to succeed in its $31.9 billion takeover bid.

Arcelor shares rose slightly after the vote Friday, by 0.3 percent to 37.60 euros, and Mittal's fell 5.1 percent to $30.60 after the news. Severstal's shares jumped 2.4 percent to 286 rubles.

Some Arcelor shareholders said after the vote Friday that Mordashov could take heart from the fact that they had not objected to Severstal, but simply picked a better deal.

"The objections were [to] the Arcelor board and its treatment of shareholders," one London-based fund manager said. The board structured the Severstal deal in a way that made it very difficult for shareholders to oppose it, he said.

Kinsch defended the board's actions, saying it had created 12 billion euros ($15.3 billion) in extra value for shareholders since Mittal first announced its bid.

Despite some sympathy among Arcelor shareholders for Severstal being used to bump up the price of Arcelor for Mittal, Mordashov's PR let him down, investors said.

"He should have come to Paris, he should have met us," Francois de Rambuteau said in an interview last week. "No one knows very much about Mr. Mordashov in Europe. It's easy for others to play on stereotypes about Russian business."

In an example of Severstal's misfiring PR campaign, on a web site set up June 20 to promote its bid a final comment was posted Friday at 1:50 p.m. Moscow time -- 50 minutes after the meeting in Luxembourg had started.

Senior Russian steel insiders said Mordashov should not be too downhearted, however.

"Mittal has a wealth of experience in international relations. Mordashov is young, he's got it all ahead of him," one Russian steel company shareholder said.

"The decision stemmed from a complex set of reasons, but one point was the clincher -- the buyback clause," a top executive at another Russian steel company said. Under the clause, withdrawn by Arcelor on June 20, Mordashov's stake could have increased to 38 percent after Arcelor completed a $6.5 billion share buyback. "This would have given Mordashov 6 percent in Arcelor for free, and no other shareholder would want to see that," the manager said.

The U-turn by Arcelor's board also pointed to an internal power struggle, the manager said. If Mordashov's bid had succeeded, he could have helped Arcelor CEO Guy Dolle squeeze out Kinsch, the manager said.

Last Monday, Kinsch said that Dolle -- who once described Mittal's steel as cheap eau de cologne compared to Arcelor's fine perfume -- was ready to step down.

For Mordashov, who will pick up a 140 million euro ($176 million) break-up fee, the best reaction would be to step back and later re-enter the market as a buyer, said Kirill Chuiko, a metals analyst with UralSib.

"The deal clearly shows that Mordashov wants to strike merger and acquisition deals and is ready to sacrifice his assets for a share in a larger company," Chuiko said. "But there aren't a thousand companies like Arcelor out there."

(The Moscow Times 03.vii.06)

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