Friday, May 26 2006 17:52 Hrs (IST) - World Time -

London: Aggressively purusing the takeover of Arcelor, global steel major Mittal today (May 26,2006) cautioned shareholders of the rival company that they were being forced into a second class combination through a merger deal with Russia's Severstal.

Mittal Steel told sources that the result of Arcelor's merger with Severstal would be a 'second class combination, and only the Mittal/Arcelor combination offers true step-change consolidation.

Earlier today, Arcelor SA agreed to buy a controlling stake in Severstal in a 16.6 billion dollar deal, which may fend off the hostile bid from Mittal. The combination is likely to surpass Mittal Steel as the world's largest steel maker.

Under the deal, Severstal will get 295 million shares or 32.2 per cent stake of 44 euro each in the merged company, Luxembourg-based Arcelor said today.

Arcelor will get an 89.6 per cent stake in Severstal, besides other steel and mining assets and 1.25 billion euros in cash from Severstal's owner Mordashov, it said.

While reacting to the development, Mittal Steel said, "Arcelor's shareholders are being forced to hand over controlof their company, whilst being denied a premium."

The company's spokesperson Paul Weigh said that yet again the board of Arcelor appears to be manipulating its shareholders base to its own ends and the vote to veto is unprecedented and prevents the shareholders from having a real choice in the future of their company.

Mittal Steel last week raised its bid to 25.8 billion euros.

Mittal said this was unprecedented and prevented shareholders from having a real choice in the future of the company.

"Arcelor's shareholders are being forced to hand over control of their company, whilst being denied a premium," it said in a statement.

Mittal spokesman Paul Weigh said the way the deal had been structured--and Arcelor's plans to spend up to 7.6 billion euro buying back shares--meant that Mordashov could quickly have a large say in how the company is run.

"Effectively he can do whatever he wants with the company," he said, stressing that, in contrast, Mittal has discussed its bid with governments and most Arcelor shareholders and has promised to respect labour deals.

"Can shareholders get the same kind of commitments from Mordashov and Severstal?" he said.

Mordashov, however, called the deal a 'breakthrough' for his company and the Russian industry's international image.

Severstal has grown rapidly in the past decade and has holdings in the United States as well as Italy, but its bid for Arcelor raises its profile.

"It's a new culture for us Russians, it's a big step forward," Mordashov told The Associated Press.

"With Russian participation, and a big chunk of Russian capital, a huge and undisputed leader in world steel market is being created" he said.

Analysts say the global steel industry is ripe for consolidation, and the proposed Mittal-Arcelor hookup accelerated discussions across the world's major steel companies.