It was supposed be a model merger and the first significant tie-up outside the energy sector as Russian companies finally get serious about taking on industrial companies abroad. But the shareholders of heavy equipment producer OMZ left their prospective bride Power Machines waiting at the altar when they failed to show up to its AGM.
A few weeks later German engineering group Siemens confessed that it had made an offer for 71% of Power Machines? shares. It started to look as if Power Machines was not the jilted bride but had been consorting with the Germans on the eve of its wedding.
The combined OMZ-Power Machines would have been a major force in heavy equipment, with more than $1 billion a year in sales. Siemens is the world?s number two maker of power-station turbines but has failed to make any impact in Russia, whose domestically made gas turbines are sturdy, relatively efficient and cheap.
?The Russians prefer to use locally made equipment. The quality is not as good as the German-made stuff, but it is a lot cheaper,? says Stephen O?Sullivan, head of research at United Financial Group. ?Unless the quality is much greater so they have to buy it ? as with seismic exploration equipment ? Russians are not prepared to pay a premium. They are absorbing western technology anyway.?
OMZ (formerly the Soviet-era machine-producing complex Uralmash) specializes in power equipment, especially that used in nuclear power stations, and also produces specialist steel. Power Machines? turbines can already be found in 40% of Russia?s power stations. Separately, the companies are not big enough to break into western European markets but together they have the economies of scale to try to do so.
In December, Power Machines, which is owned by oligarch Vladimir Potanin?s Interros industrial holding, announced a share swap with OMZ, owned by leading industrialist Kakha Bendukidze.
Unusually for a Russian merger, the plan was to exchange shares so both sides would end up owning 50%. Power Machines? officials would take executive control and the joint company said it would sell out in two to three years after the benefits from the merger had been realized. The first shares were exchanged in May and the process was supposed to be completed by the autumn.
But it all went wrong when OMZ and Bendukidze (who owns 26% of the company) failed to show up to his own AGM on June 30, which had to be cancelled because it was not quorate. Power Machines executives were due to be elected to the joint board of directors at the meeting, which must be reconvened this month.
?Interros is the one playing games, not OMZ,? said Robert Edwards, engineering analyst with Renaissance Capital. ?Bendukidze didn?t want to have Power Machines executives on the board of his company while they were still in talks with Siemens over a possible buyout.?
Siemens was keen to buy into a Russian player. The domestic heavy machinery market is currently flat but a bonanza will begin in Russia following the break-up of utilities monopoly United Energy Systems and the creation of 46 generating companies ? all of which badly need investment and modernization ? over the next couple of years.
Siemens has already been bolstering its turbine production. It has about e13 billion in ready cash and paid e1.1 billion for French rival Alstom’s turbine business last year to become the world’s second-largest maker of turbines after General Electric.
At the same time, buying a Russian is the only way Siemens can head off a looming invasion of low-cost Russian heavy equipment producers in its home markets.
Reports of Siemens? interest appeared a few days after German chancellor Gerhard Schröder paid a lightning visit to Moscow in July. Among the 30 German executives accompanying him was Siemens chairman Heinrich von Pierer.
Power Machines? general director, Yevgeny Yakovlev, later confirmed that von Pierer had offered to buy Interros?s 71% of Power Machines and had applied for permission from the federal anti-monopoly service.
?The Russian government has to give permission for the deal to go through and it is not clear if it will. The Kremlin is not going to be happy with a German company in charge of the future restructuring of the power sector,? says Edwards.
Putin perplexed
A source at the Putin-Schröder meeting said the Russian president was perplexed by the proposal but didn?t rule it out on the spot. Power Machines also has some defence contracts but Putin is unlikely to relish giving one of Russia?s most powerful oligarchs serious political cover in the form of the German government at a time when he is trying to rein all the other oligarchs in.
With the uncertainties, analysts were surprised when Power Machines let a deadline to swap its shares with OMZ pass on July 21. A swap would have kept the option of a merger with OMZ open in case the Kremlin put a spanner in the works of the Siemens deal but could have been annulled after the new joint board was convened.
Finally Siemens and Interros struck a deal. They are forming a holding company to own Interros? 71% stake. Siemens will have 50% minus one share in the holding with the right to increase the stake in the next three to five years during which Siemens plans to invest $200 million in Power Machines.
