updated 6/12/2006 7:11:08 AM ET 2006-06-12T11:11:08

Steelmaker Arcelor SA said Monday its board has rejected Mittal Steel Co.’s revised takeover offer and recommended that shareholders approve a deal with Russia’s OAO Severstal.

But Arcelor said the Severstal transaction does not preclude Mittal’s 25.8 billion euro ($33 billion) offer, and the board said officials will meet with Mittal in order to explore possible improvements to the bid.

Arcelor, which has long resisted Mittal, said the current offer “is inadequate as it continues to undervalue” the company and called the Severstal transaction “a more attractive alternative from a strategic, financial and social point of view.”

Luxembourg-based Arcelor valued itself at 44 euros ($55.70) a share in an offer to buy back up to a quarter of its capital — the same price Severstal Chairman Alexei Mordashov is paying to buy 32 percent of the combined company.

Mittal is offering 37.74 euros ($47.78) a share in an offer aimed at all equity holders. It reiterated its belief Monday that a Mittal-Arcelor merger was the best option for everyone involved and would deliver “considerably superior value.”

The fate of Luxembourg-based Arcelor lies in the hands of its shareholders, who will vote this month whether to approve the hostile takeover bid from Mittal or a plan to merge the company with Severstal.

They will also decide if Arcelor can go ahead with plans for the share buyback. Arcelor’s board seemed to ease off its battle against Mittal by saying it would not launch the self-tender offer until after Mittal announces how many shares it has bought.

Mittal needs to buy at least 50 percent of the company for its bid to succeed. Its offer closes on July 5 and the results will be published in mid-July.

Arcelor said Mittal’s revised offer does not take into account the company’s financial results for 2005 and the first quarter of this year, or Arcelor’s strategic plan.

The company has maintained all along that its plans, such as the share buyback, will bring shareholders more benefits than a takeover by Mittal.

Mittal and Arcelor representatives met last week for the first time since Mittal made its surprise offer in January after Mittal delivered a standalone business plan Arcelor had asked for.

Arcelor said Monday that the meeting confirmed the companies’ differing strategies — Mittal’s focusing on volume and Arcelor’s on margins — and synergies from a tie-up would be low compared with those that would be generated by an Arcelor-Severstal deal.

Analyst Edmund Shing of Kepler Equities in Paris told Dow Jones Newswires that Arcelor was still leaving the door open to Mittal. “They’re saying, we can negotiate, but you have to pay us more,” he said. “For Mittal, there’s no comparable deal of size or fit. Mittal is saying, ’We either stay as we are or do the big deal, even if it’s more expensive. It’s the imperative deal.”

Arcelor also defended the structure of the vote it has set up for the Severstal deal. Mittal has complained that Arcelor has sewn up the deal by saying that shareholders representing 50 percent of all shares need to vote against it to block it. Shareholders representing only 35 percent went to Arcelor’s annual meeting in April.

“The board is certain that it acted not only lawfully, but also in the best interest of Arcelor, its stakeholders and its shareholders,” it said. “In fact, the board is convinced that in the absence of the Severstal proposal, Mittal Steel would not have improved its offer.”

It said it had received a letter from shareholders claiming to hold 30 percent of Arcelor demanding another general meeting to ask for two-thirds of shareholders to approve the deal.

Mittal and its advisers, investment bank Goldman Sachs, are trying to mobilize shareholders to block the Severstal transaction.

Arcelor agreed to allow shareholders to vote on calling another meeting — recommending they reject it — but criticized giving “a small fraction of Arcelor’s shareholders representing significantly less than a third of the capital” the right to block the Severstal deal.

Another shareholders’ meeting would be unnecessarily complex and could “deprive Arcelor shareholders of the Severstal alternative,” it said. Any meeting could only take place in mid-August when Mittal would be able to vote any Arcelor shares it had won, which could allow it vote against the deal, it said.

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