Hedge fund piles pressure on Mittal for equitable merger deal

A hedge fund has accused Lakshmi Mittal of being "unfairly prejudiced" toward minority investors and called for the steel billionaire to exclude himself from a shareholder vote on the final terms for last year's merger of Arcelor and Mittal.

In an open letter to Mr Mittal, the Monaco-based hedge fund SRM Advisers said ArcelorMittal is offering terms to a small minority of Arcelor investors that are "materially less favourable than originally offered to all shareholders last year".

SRM is prepared to launch legal action against ArcelorMittal in a Luxembourg court if it fails in its effort to get the terms improved. The hedge fund has failed in two prior cases on the same issue in France and the Netherlands.

Mittal merged with Arcelor last year to create the world's largest steel company. Just over 6 per cent of Arcelor shares remained traded on the Paris exchange and were bought up mainly by hedge funds.

The long-running dispute revolves around the exchange ratio at which the original deal was struck. Under the merger last year, Mittal offered 11 ArcelorMittal shares for every 7 shares held by Arcelor investors. After most investors tendered their shares to the deal – 94 per cent – ArcelorMittal then altered the terms, offering 8 ArcelorMittal shares for every 7 Arcelor shares to the few remaining investors who had not yet tendered their stock.

The company will hold an extraordinary meeting on 5 November at which investors will hold a vote on the final terms. SRM has requested that Mr Mittal and the rest of ArcelorMittal shareholders should abstain from the vote.

Rather, they should defer to the holders of the remaining 6 per cent of Arcelor shares and let the "majority of the minority" decide whether the swap ratio is appropriate. "This would allow the minority Arcelor shareholders to decide themselves on the merger ratio ... If the 'majority of the minority' were to agree with you and Mittal, the 8/7 exchange ratio would be deemed to be fair," SRM said. "If not, the minority shareholders would require you and Mittal to put forward a revised exchange ratio for their approval."

ArcelorMittal dismissed the complaint. "The exchange ratio has been calculated on the intrinsic value of both companies... We believe that the ratio is equitable to both Arcelor minorities and ArcelorMittal shareholders," it said.

AN OPEN LETTER TO LAKSHMI MITTAL, PRESIDENT & CHIEF EXECUTIVE OFFICER, ARCELORMITTAL

Mr Mittal,

We believe that minority shareholders of Arcelor, including SRM, are being unfairly prejudiced by ArcelorMittal's proposal to merge with Arcelor S.A. In 2006 Mittal Steel ("Mittal") originally offered 11 shares of Mittal in exchange for 7 shares of Arcelor and announced its intention to merge the companies at a ratio consistent with the terms of the original offer.

Mittal is now proposing to acquire the Arcelor minority at a ratio of only 8 Mittal shares for 7 Arcelor shares. Such terms are materially less favourable than originally offered to all shareholders last year...

The acquisition of minority interests at a material discount in these circumstances is contrary to market practice and the relevant EU directives...

The terms of the original offer were approved by your financial advisers, Goldman Sachs International and Morgan Stanley & Co. Limited. However, we consider that the terms do not contain any risk warnings for Arcelor minority shareholders that the merger terms could be changed and that any such variations could be imposed on Arcelor minority shareholders.

We understand that it is a matter of public record that you and your family constitute the largest shareholder in Mittal. It follows that by proposing the 8/7 ratio both you and Mittal believe the ratio to be fair for Arcelor minority shareholders.

Given the above facts, we request on behalf of the Arcelor minority shareholders that ArcelorMittal abstain from any vote to approve the 8/7 ratio at the Arcelor Extraordinary General Meeting on 5 November 2007.

Both Arcelor and Mittal have stated on multiple occasions that their merger will adhere to best market practices. Therefore in deciding to adopt the 8/7 merger ratio we believe that Arcelor and Mittal should abstain from voting and defer to the "majority of the minority". This would allow the minority Arcelor shareholders to decide themselves on the merger ratio at the Arcelor Extraordinary General Meeting. If the"majority of the minority" were to agree with you and Mittal, the 8/7 exchange ratio would be deemed to be fair. If not, the minority Arcelor shareholders would require you and Mittal to put forward a revised exchange ratio for their approval.

There is a precedent for the "majority of the minority" concept. When you proposed the appointment of your wife to the board of Mittal you agreed not to vote your shares. We think that it is entirely appropriate for you and Mittal to recognise the obvious conflict of interest that arises in your recommendation for the 8/7 ratio. We would therefore request that you demonstrate your good faith and willingness to protect your minority investors by abstaining to vote on this occasion.

SRM is not seeking to prevent the merger between Arcelor and Mittal. However, we believe that the Arcelor minority shareholders are entitled to expect that both Arcelor and Mittal honour the terms of the original offer made in 2006 which clearly contemplates the manner in which the interests of minority shareholders would be acquired.

Yours sincerely

For and on behalf of SRM Advisers (Monaco) SAM