updated 5/26/2006 9:15:52 AM ET 2006-05-26T13:15:52

Arcelor SA, the steelmaker fighting a hostile bid from rival Mittal Steel Co., said Friday it reached a deal that would give it a controlling stake in Russia's largest steelmaker Severstal and $1.59 billion in cash in exchange for 32 percent of Arcelor.

Mittal Steel Co. immediately criticized the deal as a "second-class combination," saying Arcelor's board seemed to be manipulating shareholders to their own ends.

Arcelor fought hard against Mittal's bid, complaining about the company's corporate governance, which is heavily weighted toward the Mittal family. Arcelor also complained that Mittal's original offer of 18.6 billion euros ($23.75 billion) undervalued the company. Mittal offered last week to raise its bid to 25.8 billion euros ($33 billion).

Under the deal announced Friday, Severstal's controlling shareholder Alexei Mordashov will pay Arcelor 1.25 billion euros ($1.59 billion) in cash and give it his stake in all of Severstal's steel assets and Italian steelmaker Lucchini SpA, according to an Arcelor statement.

In exchange, Mordashov will own 32 percent of the enlarged Arcelor. Existing shareholders, who will own the remaining 68 percent, can vote on the deal at a shareholders' meeting next month.

Arcelor Chief Executive Guy Dolle said the deal _ worth 44 euros ($56.12) per share, excluding a planned 1.85 euros ($2.36) per share dividend _ represents the "real value" of the company.

Arcelor said the transaction would go through by the end of July unless more than 50 percent of the current outstanding shares voted against. Dolle expressed confidence that shareholders would approve the bid.

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 euros ($9.7 billion) 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 labor 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 deal with 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."

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.

Mordashov said the Mittal offer had been a "catalyst" for his deal with Arcelor, though Dolle insisted that his company and Severstal had been in talks since 2002.

Mordashov — whose company's financial methods came into question in the days of emerging Russian capitalism in the 1990s — said the new company would "have the best corporate governance, by world standards."

Under the planned terms, Arcelor Chairman Joseph Kinsch and Dolle would keep their posts in the company, and Arcelor would remain based in Luxembourg. Mordashov would become non-executive president of Arcelor's board of directors and would have the right to nominate six out of 18 board members.

The combined companies will keep Arcelor's corporate governance model, with a one-share-one-vote policy and at least nine independent board members.

Mordashov has agreed to vote his shares according to the board's recommendations. He agreed to not increase his stake in Arcelor for four years, and to not get rid of his shares in the company for five years.

Arcelor shares fell 3.6 percent to 32.82 euros ($41.91) Friday, while Mittal shares rose 2.7 percent to 25.17 euros ($32.14). Severstal shares were up 10 percent at $13.35 euros ($10.47) on RTS, Russia's benchmark index.

Dolle said the deal is consistent with the company's goal to expand in Brazil, Russia, India, and China. Arcelor expects synergies of 590 million euros ($752.54 million) or more from the deal.

Mordashov said the deal would help Severstal reduce delivery delays and improve the bottom line of both companies, without elaborating. He also gave no information on debt, including how much debt the combined company would take on to complete the deal. He also declined to confirm rumors that Russian President Vladimir Putin was consulted about the deal.

Analyst Rob Edwards with the Renaissance Capital investment bank in Moscow said the deal illustrated the global clout of Russia's steel companies.

"This is a good ambassadorial role for Mordashov," Edwards said. The 40-year-old ranked No. 64 on Forbes' latest list of the world's richest people, with a fortune of $7.6 billion.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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