September 30, 2008 8:21 am

Metals: The merger that went sour

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When Oleg Deripaska’s UC Rusal announced last year that it was buying a 25 per cent stake in Norilsk Nickel, investors were delighted.

It seemed to be the first step towards joining two of Russia’s biggest metals companies to forge a rival to BHP Billiton.

But Mr Deripaska has collided with Norilsk’s biggest shareholder, Vladimir Potanin, the Russian billionaire, for control of the world’s biggest nickel miner.

Instead of working to create a Russian metals giant, the clash of the oligarchs for Norilsk has become a cautionary tale for how minority investors can be caught in the crossfire of takeover battles, while some shareholders fear corporate governance standards could fall by the wayside.

The battle has helped destroy two-thirds of Norilsk’s market value. Part has been erased by the market crisis this September caused by the credit squeeze and investor flight from political uncertainty. It was worth $60bn when UC Rusal bought the 25 per cent stake from Mr Potanin’s former partner in April. Now it is worth about $22bn.

Despite talk last year that creation of a Russian metals giant was next on the list of state priorities, as it sought to strengthen its clout over the economy, the Russian government looks to be staying on the sidelines while Mr Potanin, who officially owns nearly 30 per cent of the company, and Mr Deripaska fight it out.

But its shares have fallen much more rapidly than those of any other Russian company. Several senior executives left when Mr Potanin, in effect, seized control in July.

In late September, even a Potanin-appointee, Alexander Popov, resigned as deputy chief executive in charge of the financial bloc, saying “the situation is seriously limiting the ability of top management to take the necessary decisions”.

The boardroom battle is preventing any decision-making, says one leading investor. “We are in deadlock,” he says. The rapid rotation of senior executives is raising fears about the operations; Alexander Bulygin, UC Rusal chief executive, says he fears production could fall by 8 to 11 per cent next year, partly because of the dispute.

These concerns were heightened when Mr Potanin, who took control of the company when he was voted in as chairman of Norilsk’s board in July, appointed as chief executive a man who had no experience of metals and mining.

In an apparent bid to win government backing, Mr Potanin appointed Vladimir Strzhalkovsky, a former KGB agent and the head of the state tourism committee.

Investors are staying away. “It used to be my favourite stock. But now I would be very cautious about touching it,” says Eric Kraus, an adviser to Otkritie, a Russian brokerage, who has worked in Russia for more than a decade.

The global credit squeeze is making it unlikely there will be a solution soon, as both sides will have limited access to cash to buy each other out. “All these big takeovers are predicated on the condition that billions of dollars in western cash is going to be available,” says one senior western banker. “It’s not going to be available. They are not going to be able to do the takeovers they planned.”

The merger plan “is dead money” says Rob Edwards, managing director for metals and mining research at Renaissance Capital, the Moscow investment bank.

But Mr Bulygin says he is hoping the credit squeeze could create opportunities: “The fall in value of several metals and mining assets is an additional opportunity.”

He says Rusal would not go over a 30 per cent threshold in Norilsk without making a proposal to remaining shareholders as required by Russian law. This is a tough proposition without access to credit markets.

And UC Rusal’s plans to launch an initial public offering next year may be delayed because of the market situation, also complicating plans for a tie-up. “I can’t rule out revising the timing if the situation worsens,” Mr Bulygin says.

The credit squeeze is adding to corporate governance concerns.

Mr Potanin has been a champion of corporate governance standards in Russia. But Mr Deripaska has accused him of building a 35 per cent stake in Norilsk, past the threshold at which he should have made an offer to all shareholders.

Investors say voting patterns at the annual meeting in June suggest he holds more than 30 per cent.

At that meeting, Mr Potanin managed to win enough seats for a majority of the board.

But Mr Potanin’s Interros holding group denies breaching the law, saying it holds about 30 per cent.

Although the oligarchs are abiding by the rule of law and acting in the interests of shareholders, loopholes can be found. Russian law does not prohibit shareholders from acting in concert, for instance.

“There is plenty of scope for doing whatever you like with the law. Russian law is so prescriptive, it’s full of holes,” an investor says.

As for Rusal, the stand-off has made it more determined. “We have absolutely rejected merging the companies on the platform of Norilsk,” Mr Bulygin says. “It can only be merged on the basis of Rusal.”

He adds that Rusal hopes to make use of the crisis to expand into metals and mining no matter what happened with Norilsk.

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