Friday, February 13, 2009

Russia: Russian antitrust authorities against state involvement in the metals industry merger

As worldwide demand for metal plummets, Russia's top metals producers are finding that bailouts aren't enough. Instead, the industry's leaders have proposed a massive merger of their assets to create a quasi-state metals holding company.

The most active proponent of the merger is Metalloinvest chief executive Alisher Usmanov (#91 on the Forbes Billionaires List). Russian media report that the iron and steel magnate is hoping to merge his iron ore assets and his stake in the Udokan copper deposit into the Norilsk group. Control of Norilsk Nickel, the world's largest nickel producer, is currently shared by Usmanov, Vladimir Potanin, Oleg Deripaska and minority shareholders. John Helmer of, a metals and mining resource, reports that under Usmanov's model, the owner of Metalloinvest would become the single largest stakeholder in Norilsk, with a 37% stake, while Potanin's stake would fall to 16.6%. In return for liquidating Usmanov's and Potanin's debts, the state would claim over 30% percent of the company, effectively creating a state-controlled monopoly.

The alternative merger model, proposed by Potanin and others, would incorporate Norilsk Nickel, Metalloinvest, steel producer Evraz Group (owned by Roman Abramovich and Alexander Abramov), steel and coal producer Mechel OAO (owned by Igor Zuzin), Russneft (owned by Oleg Deripaska) and Uralkali (owned by Dmitry Ribolovlev). Under this model, government's share would not exceed 25 percent, keeping the new diversified holding mostly private.

Russian antitrust authorities have denounced the merger idea, stating that it would not have any positive effects on the metals industry. Alexei Ulyanov, head of the industrial department of the Russian Antitrust Committee, said at a press conference this week that if a merger application is filed, the committee will not approve it: "If all metals companies were to merge into one holding with major government ownership, it would be a disaster. The government is not an effective manager of industrial groups," Ulyanov said.

John Foley, metals analyst for the RUXX Index, believes the more weighted, "free market" model of the merger is the more effective of the two. "The merger might be a good solution for the industry, but the less direct control is exercised by the state, the more effective the newly formed company will be. Creating a quasi-state holding with little diversification, as Metalloinvest proposes, is throwing good money after bad -- especially since analysts think Metalloinvest has more than $10 billion in debt. This massive debt creates a huge burden for both the government and the proposed holding company."

Regarding the legality of the merger, Foley believed the decision lay outside the Russian Antitrust Committee's jurisdiction. "A merger of this magnitude should not be subject to the authority of the Antitrust Committee once it is clear that antitrust laws are not being violated," the analyst said. "The deal should be reviewed by the Ministry of Economic Development."

Vladimir Strzhalkovsky, CEO of Norilsk Nickel, is also wary of the Metalloinvest plan, and has outlined his concerns in an interview with Russian business daily Kommersant: "Any merger model should be about efficiency rather than the desire to push your debt onto other companies. Metals prices move in cycles. When the price of metal falls, prices for other products, such as the potash fertilizers Uralkali produces, rise, creating a revenue stream for the holding. Mergers should be about diversification. Nickel prices move in the same direction as the ore, so the merger with Metalloinvest that Usmanov is lobbying is ineffective."

Source: RUXX Index
Published by Mike Hitchen, Mike Hitchen Consulting
Putting principles before profits