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It is unprecedented in corporate takeover practice for white knights to beg to pay more for the privilege of rescuing those who appeal for help; and positively quixotic for them to accept less for their chivalry.

However, Russian steelmaker Alexei Mordashov appears so keen to sell out his assets, and ride his rapidly thinning charger out of the Russian steel sector, he has agreed to give Arcelor, Europe’s largest steelmaker, another Eur2.5 billion in asset value, in return for a smaller shareholding stake in the company.

Since January, Arcelor has been facing a hostile takeover from Mittal Steel, controlled by Lakshmi Mittal. Last month, just after Mittal raised ‘ the price of his offer, Arcelor and Severstal announced a merger of their companies on terms that, if accepted by Arcelor shareholders, will defeat the Mittal bid.

Expert valuations differ, but the Severstal offer of May 26 promised to hand over steelmaking assets in Russia, the US, Italy, and the UK, worth ., (to Mordashov) an estimated Eur9.5 billion, plus Eurl.25 billion in cash. In return, he agreed to accept Arcelor shares which the market valued, on the day before the deal announcement, at Eur7.3 billion.

Late Tuesday evening, Severstal, Russia’s third largest steelmaker and Mordashov’s property, offered to sweeten these terms. The new deal will add to the underlying value of Arcelor’s shares, and shorten ‘Mordashov’s stake in the company. Under the revised proposal, Alexei Mordashov, Severstal’s majority owner, would reduce his equity stake in the combined company from 32% to 25%, the Russian steelmaker said.

In a statement posted on the website of Severstal Group, it is reported that, according to the new terms, Mordashov “will now receive 210 million new Arcelor shares (previously 295 million), representing approximately 25% of the enlarged company (previously 32%).”[Mordashov’s post as chairman of] The Strategic Committee will be eliminated. In return, Mr Mordashov will be free to vote his shares in line with normal shareholder practice and the standstill and lockup provisions will be eliminated. The cash contribution from Mr. Mordashov of €1.25 billion will no longer be included. In all other respects, the merger agreement will remain unchanged.”

At the new reference price of Eur44 per share, which Mordashov and Arcelor agreed to last month, this means he is foregoing Eur3.74 billion in value. Since he will keep Eurl.25 billion in cash he proposed to hand over, but the asset transfer remains the same, the new offer is thus Eur2.49 billion more costly for Mordashov, or that much more valuable for Arcelor.

Mordashov holds 89.5% of Severstal’s shares, and so in its announcement of the new offer, Severstal’s website announcement avoids the embarrassment of explaining to minority shareholders why the boss has accepted the devaluation of his own shares. Instead, addressing Arcelor’s shareholders, Severstal claims that “based on yesterday’s closing price for Arcelor shares of €34.70, the revised terms represent an acquisition multiple of 3.6x 2005 EBITDA for the e contributed businesses, and a value enhancement of €2 billion for Arcelor shareholders.”

According to a report by Moscow brokerage Alfa Equities, Severstal has been obliged to swallow a devaluation of its assets by between 16% and 25%. “Overall,” reports Alfa, ” the improved terms of the offer for Arcelor imply a reduction in Severstal’s valuation of approximately $2-$3 per share, which we see as negative.” There is no explanation of why Mordashov would do that. More sensitively, noone in Moscow has thought to ask, at least not yet and not loudly,, whether the permission Mordashov received from the Kremlin to sell his Russian assets to the Luxembourg corporation at one price might be reconsidered, now that he’s proposed to take a much lower one.

Such behaviour on Mordashov’s part is unprecedented among Russian oligarchs and corporate proprietors, whose novel grip on capitalism has persuaded them never to buy minority stakes in companies without seeking control for the money; and never to spend more than a billion dollars of their own money on acquisitions (if other people’s money can be used just as well).

According to the revised offer, Mordashov has offered the assurance that he has no intention of attempting a takeover of Arcelor. “Mr. Mordashov confirms,” says the Severstal statement, “his intention not to increase, either actively or passively, his shareholding in Arcelor above 33.3% without making a mandatory tender offer to all shareholders in accordance with Luxembourg law.”

The move reverses several statements Mordashov has made since the Severstal merger was first disclosed on May 26. At first, Mordashov claimed he was interested in taking his stake up to 45% of Arcelor. To comply with Luxembourg corporate regulations, however, that would require an offer to buy out all minority shareholders, and Mordashov withdrew his claim. It has also been reported that the terms of the Arcelor share buy-back would result in Mordashov’s stake rising from g 32% to 38%. This also appears to have been withdrawn.

In return, the small print of the May 26 deal, locking Mordashov into holding his newly minted Arcelor shares for five years, has been erased. He would now be free to sell his stake whenever he wishes. That Arcelor’s share price is unlikely to remain as high as Eur44, once the takeover conflict is settled, suggests that Mordashov is staring a huge Jk loss risk in the face. Between buying in at Eur44, and selling out at today’s Paris price for Arcelor of Eur35.02, there is a difference for Mordashov of Eur 1.7 billion.

The only reason a Russian oligarch behaves this way is if he is in fear of being bought out by the state at an even lower price. The only Russian precedent for such a large and risky portfolio play was Vladimir Potanin’s and Mikhail Prokhorov’s $1.16 billion purchase of a 20% stake in Gold Fields in March 2004. As became well known, their real intention was to build up to a takeover, and reverse their Norilsk Nickel ‘ gold assets into Gold Fields shares. When that failed (not least of all,because the Kremlin didn’t approve) — and after the Harmony Gold takeover bid collapsed — Potanin and Prokhorov sold out. The mark to market gain they earned at the end was $191 million.

Mordashov’s case is different. He appears to have been pressured by e> Luxembourg into paying more, and conceding less value, by Arcelor shareholder concerns that he is planning an eventual takeover of the company, despite public assurances from Arcelor that this will not jm/ occur, and private guarantees that it cannot.

A 38-page document issued by Arcelor on June 12, entitled “The Arcelor- Severstal Merger”, sets out in detail the terms and conditions already agreed between Mordashov and Arcelor in their so-called “Strategic Alliance Agreement”. These revealed the extraordinarily restricted executive status which Mordashov had accepted vis a vis the Arcelor management.

The one modest improvement Mordashov can now claim from his throwing more value at Arcelor is that he’s been permitted to say that he may “vote his shares in line with normal shareholder practice.” That’s a discreet way of saying that the previous conditions were far from normal. According to Arcelor, these included limitations on how Mordashov might appoint directors on the Arcelor board, and how they might not vote against “the consensus” of the other board directors. In short, before Mordashov was offering to accept voting power on the Arcelor board that was less than his shareholding would normally provide in such a corporation. Now he’s agreed to less shareholding, and less seats on the board, so that he couldn’t have the votes to challenge the Arcelor majority in any case.

Sources in Moscow told The Russia Journal that several weeks ago, while talking with Mordashov, Arcelor negotiated a parallel ‘merger’ agreement with Vladimir Lisin, Russia’s fourth largest steelmaker. But Lisin rejected the shareholding Arcelor offered — reportedly between 15% and 25% — as too little for his assets and cash.

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