UPDATE 3-Russia's Severstal makes rival bid for Esmark

(Recasts, adds Esmark, Severstal, USW comments, adds byline)

By Steve James

NEW YORK, May 20 (Reuters) - Russia's OAO Severstal (CHMF.MM)(CHMFq.L) made a rival bid for U.S. steel company Esmark Inc ESMK.O on Tuesday, days after the steelworkers' union threatened to block an offer from India's Essar Steel Holdings for Esmark.

Severstal, a mining and metals company, said its proposal was worth $1.24 billion and was backed by the United Steelworkers union (USW). Under an agreement with the company, the union can come up with an alternative deal.

Chicago-based Esmark, which acquired U.S. steelmaker Wheeling-Pittsburgh last year, valued the bid at $1.1 billion.

After the news, Esmark shares closed up 17 percent, or $2.60, at $18 on Nasdaq.

Bill Keegan, a spokesman for Esmark, said the company was reviewing an offer letter from Severstal. He said the offer was similar to one from Essar -- $17 per share and the assumption of $400 million debt.

Keegan said Esmark's material agreement with Essar "is now subject to a competing bid, which we will entertain."

"Essar and Severstal are both excellent global companies and Esmark CEO Jim Bouchard will be reaching out to Severstal (International CEO) Gregory Mason to discuss the offer and how to provide the greatest value for shareholders and the future of the Ohio Valley," he said. Wheeling-Pittsburgh is a big employer in the steel-making area.

In April, Esmark said it agreed to material terms of an offer from Essar. But last Friday the USW demanded that the company repudiate the deal, asserting it was in violation of the union's collective bargaining agreement.

Under the agreement, the company cannot sign a deal and arrange financing without first providing the union with appropriate notice and an opportunity to bring forward an alternative proposal.

Under another section of the USW labor agreement -- called the Successorship Clause -- Esmark and Essar cannot close the proposed transaction until Essar has entered into a collective bargaining agreement with the union.

The USW told the company it would use that power to block the Essar deal.

Just prior to the Severstal bid being made public Tuesday, Esmark responded to the USW saying it had honored the provisions of the collective bargaining agreement.

"The USW is attempting to challenge a transaction which would maximize value for our shareholders and revitalize Wheeling-Pittsburgh Steel and the Ohio Valley," Bouchard said in a letter to the union.

"Despite the USW's direct involvement in the sale process ... the USW has not made or otherwise arranged an offer for the company that is equal to or superior to Essar's proposed transaction" Bouchard said.