PARIS, May 26: European steelmaker Arcelor said on Friday it would buy Russian company Severstal in a 12-billion-euro deal that according to analysts could thwart a hostile raid by Mittal Steel.

The merger, to be finalised at the end of July if accepted by shareholders, will create the world’s biggest steel group with a turnover of 46 billion euros, Arcelor and Severstal said in a statement.

The announcement came after Arcelor said this week for the first time that it was prepared to consider Mittal’s 25.8-billion-euro offer, which values Arcelor’s shares at 37.74 euros.

Arcelor had previously been staunchly opposed to the deal, and for weeks the media have speculated that it was seeking a “white knight” to head off Mittal’s bid.

The deal with Severstal values Arcelor shares at 44 euros — nearly 13 billion euros in total or double what they were worth on January 26, the day before Mittal launched its takeover bid.

But investors reacted warily to the announcement. Arcelor shares slid 4.32 per cent to 32.59 euros in late-afternoon trade on the Paris CAC 40 exchange.

And Mittal, currently the world’s top steel group, slammed the plan.

“Yet again the Arcelor board appears to be manipulating its shareholders’ base to its own ends,” said a Mittal spokeswoman. “The result would be a second class combination. Only the Mittal/Arcelor combination, which is superior in every way, offers true step-change consolidation.”

Gerard Augustin-Normand, the head of fund management firm Richelieu Finance, warned that because of Arcelor’s dispersed shareholding and the terms of the deal, Severstal would end up controlling the merged group.

“The arrival of capital from a little-known group (Severstal) which will take an unavoidable position is in my opinion a matter of concern,” he told AFP.

Broker CA Cheuvreux said however in a statement that “the proposed acquisition of Russian Severstal would make a lot of operational sense.”

It added that while there was still some chance that Mittal could take over Arcelor, the new merger plan had reduced that likelihood.

Russian Finance Minister Alexei Kudrin said the Arcelor-Severstal plan was a sign of confidence in the Russian economy.

French Prime Minister Dominique de Villepin, who has expressed strong opposition to Mittal’s takeover bid, said his government should not interfere with Arcelor’s plan to merge with the Russian company.

But he also reiterated his call for “economic patriotism.”

“In today’s economy, there are management boards that take decisions... based on what they believe to be the interests of their company.

“And then there are states, which want to accompany these economic developments, and that is why I defend the idea of French and European economic patriotism,” said Villepin.

Arcelor and Severstal had already set up a joint venture in 2002 and opened a plant in Russia in April.

Severstal’s president and owner, Alexey Mordashov, will receive about 32 per cent of the new merged group, which will operate under the Arcelor name, as well as the position of non-executive chairman of the Arcelor board of directors, with Guy Dolle remaining chief executive officer.

But Mordashov will also contribute 1.25 billion euros in cash to Arcelor, making the net cost of the deal about 12 billion euros.

He has committed not to increase his stake in the merged group for four years, or to sell any of his shares for the next five years.

Dolle, who insists that the planned merger with Severstal would not result in job losses, said that he had “great confidence that the majority of shareholders will accept it.”

An Arcelor shareholders’ general assembly will be held in late June to consider the transaction, Dolle said at a press conference in Luxembourg.—AFP