The deal has been concluded at a significant premium to Arcelor's closing price of €34 yesterday. Mittal's revised bid for Arcelor was at €35.62, in cash and equity shares of Mittal Steel.

Arcelor said it would go ahead with the merger if at least 50 per cent of the shareholders approve it. It expects the deal to be concluded as early as July this year.

Arcelor said it is targeting normalised EBITDA of €10 billion per annum for the merged entity. It expects to save €590 million through synergies with Severstal, which could go up from capital expenditure.

Severstal is controlled by Russian billionaire Alexey A Mordashov, who is worth over $7 billion according to Forbes. Mordashov would invest an additional €1.25 billion in the merged entity, taking his stake in the merged entity to 32 per cent. The balance would be held by existing shareholders of Arcelor.

Mordashow would become non-executive president of the combined entity and would have the right to nominate up to 8 members to the Arcelor-Severstal board.

The combined entity would overtake Mittal Steel as the largest steel producer in the world in volume terms. Arcelor-Severstal combine would have total steel output of over 70 million tonnes per annum, almost 10 million tonnes higher than Mittal Steel. The merger would strengthen the presence of Arcelor in Russia and Italy besides giving it a wider foothold in the US.

Severstal is the largest Russian steel producer, with 2005 annual steel production of 17.1 million tonnes. It is the second-largest flat steel producer in Russia with annual production of 10.9 million tonnes. In addition, Severstal owns the US-based steel maker Severstal North American, the fifth-largest integrated steel maker in the US with 2005 production of 2.7 million tonnes, and Lucchini, Italy's second-largest steel group with 2005 production of 3.5 million tonnes.

Severstal is one of the world's lowest cost and most profitable steel producers, with 2005 EBITDA per tonne of approximately 150 euros per tonne.

The deal also includes Severstal-Resource, which produces coking coal, thermal coal, iron ore pellets and iron ore concentrate. Severstal-Resource owns 70 years of iron ore reserves and 84 years of coal reserves. 2005 revenue and EBITDA were approximately €1.12 billion and €506 million, respectively.

After the sudden move from Arcelor, the options for Mittal are limited and would be highly costly. He can either increase the offer for Arcelor above €44 per share or launch a bid for the Arcelor-Severstal combined entity at a later date.

Mittal would have to find more financial resources for a higher bid for Arcelor or a bid for the merged entity. A higher bid would most certainly lead to a decline in the share price of Mittal Steel. Additional debt or equity dilution to fund a higher bid would threaten its financial stability in the event of a downturn in the steel cycle.