Russia: Third player joins Norilsk battle

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Lucy Fitzgeorge-Parker
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Metalloinvest backs mega merger; Deripaska refuses to sell stake

Two is company, three’s a crowd. (l–r) Oleg Deripaska, Vladimir Potanin and Alisher Usmanov

Two is company, three’s a crowd. (l–r) Oleg Deripaska, Vladimir Potanin and Alisher Usmanov

The battle for control of Norilsk Nickel took an unexpected turn last month when Alisher Usmanov, the oligarch at the head of iron-ore producer Metalloinvest, announced that he was joining forces with fellow minority shareholder UC Rusal, raising the prospect of a three-way merger that would create a national metals and mining champion.

Rusal, the aluminium company controlled by Oleg Deripaska, has been embroiled in an escalating dispute over Norilsk with fellow shareholder Vladimir Potanin’s Interros since acquiring a 25% stake in 2008. The latest round of hostilities began in June last year, when Potanin persuaded Norilsk’s management to vote Interros an extra seat on the board, ending the parity between the two oligarchs.

The ensuing conflict has been acrimonious. Rusal launched a PR campaign against Interros and Norilsk’s management in an attempt to sway the remaining minority shareholders. Its opponents responded by engineering the sale of an 8% stake in Norilsk to Trafigura in December and a $3.47 billion share buyback the following month, while Potanin increased his own holding in Norilsk from 25% to 30%.

Norilsk also made a series of increasingly generous offers to buy out Rusal’s stake, all of which Deripaska rejected. In an attempt to regain the upper hand, Rusal called an extraordinary general meeting for March 11 and obtained an injunction in a Caribbean court to prevent voting of the Trafigura and treasury shares. This, however, was overturned before the EGM.

Alliance with Rusal

Following that meeting, Usmanov revealed that Rusal had backed his nominee for the Norilsk board, Metalloinvest chairman Farhad Moshiri, and that the two companies had signed a memorandum of cooperation for further action on Norilsk. He also announced plans to buy Norilsk shares on the open market to increase his 4% stake, and commented that a merger between Norilsk, Rusal and Metalloinvest was "inevitable".

Both the timing and content of the announcement puzzled analysts. Usmanov had not played an active part in the Norilsk saga since 2008, when he signed a similar cooperation agreement with Interros and floated proposals for a two-way merger. Between them Usmanov and Deripaska control just 29% of Norilsk, against the 45.7% now held by Interros and its allies, and whereas Norilsk has a cash pot of $1.1 billion that could be used to fund further share buybacks, Metalloinvest is in debt to the tune of more than $4 billion.

Talk of a merger also seems premature. Combining privately held Metalloinvest with either Norilsk or Rusal would be problematic, and the long-awaited listing of the iron-ore producer, promised for this spring, has once again been postponed because of market conditions. In addition, a more obvious focus for Usmanov is finding a suitable buyer for the 20% stake in Metalloinvest put up for sale by Vasily Anismov.

In the circumstances, many observers dismissed ­Usmanov’s alliance with Rusal as an opportunistic attempt to increase the value of his own Norilsk holding – an understandable response, adds Dmitry Smolin, metals and mining analyst at UralSib in Moscow, given that despite the company’s large cash pool Norilsk shares have paid no dividends in two years. On this theory, Usmanov believes Norilsk will ultimately have to buy out Rusal’s stake at a hefty premium and his own with it.

Logical solution

For many, indeed, this seems the only logical solution to the stalemate at Norilsk, given Potanin’s tightening grip on the company. Nevertheless, Deripaska’s rejection of the most recent offer from Norilsk in February of $12.8 billion for a 20% stake – a premium of more than 30% to market prices – suggests that he endorses Usmanov’s view that consolidation is "inevitable" and is manoeuvring for control of a combined metals and mining champion.

If that were not the case, says Smolin, it is hard to see why Deripaska turned down an offer that would have enabled Rusal to clear its $11 billion debt load, much of which comes with covenants designed to restrict expansion, and that had the public backing of at least two of Rusal’s key minority shareholders, Viktor Vekselberg and Mikhail Prokhorov. He identifies several potential post-sale targets for Rusal, including Kazakh metal producer ENRC.

"Part of the reason this conflict has gone on so long is that they are more or less equally favoured politically"

Robert Mantse, Otkritie

Robert Mantse, senior metals analyst at Otkritie in Moscow, warns against attaching too much importance to the debt covenants. "There are ways around it," he says. "We saw last summer Rusal was able to do an off-balance-sheet project financing for $1.7 billion for the Boguchanskaya hydropower plant and the first phase of the Boguchansky aluminium smelter. I don’t think Rusal would sell its stake in Norilsk Nickel just to get rid of those covenants and debt."

He agrees, however, that the standoff between Deripaska and Potanin is about who will take charge of a merged entity, adding that the tension has been exacerbated by the fact that both oligarchs have strong political backing. "Part of the reason this conflict has gone on so long is that they are more or less equally ­favoured politically," he says. "If there wasn’t that balance then the conflict would have already ended, with the less politically connected person losing."

Few expect a speedy resolution to the dispute. "The problem is negotiation," says Smolin. "Deripaska and Potanin are not negotiating directly together at the moment; they are just issuing press releases and talking to each other through the media." He is doubtful that an accommodation can be reached before the end of the year and expects another battle over the election of a new board of directors at the AGM in June.

Vladimir Zhukov, senior metals and mining analyst at Nomura in Moscow, is also sceptical that a coordinated tripartite merger can be reached given the current layout of shareholders and management at Norilsk. He suggests that the impetus for change could come from within Rusal itself, if Vekselberg goes through with plans to sell his 15.8% stake in the company.

"If Norilsk ends up buying shares from Vekselberg they could imitate Rusal’s strategy at Norilsk by running the same kind of negative campaign against Rusal and then forcing Rusal to swap the stakes," he says.

Mantse dismisses this as unlikely but agrees that it is hard to see how the battle will end, if Deripaska and Potanin both continue to fight. "You’ve got two very strong shareholders, both with deep pockets, both politically connected, neither one is desperate and they have very different agendas," he says.