Rusal in Trouble: Rusal-Norilsk Merger Nixed by Moscow

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M&A Activity, Precious Metals

Russian business dealings have always been a conflict between personal gain and corporate priorities in a way that makes many in the west look on in bemused fascination. In a few short years, some individuals have emerged with personal wealth, at least on paper, which puts them in the Ëœmega billionaire’ and Ëœworld’s wealthiest individuals’ league. The morality, if not the legality, of how they got there is the subject of another topic at some time but for now a telling comment by Kremlin economic adviser Arkady Dvorkovich underlines the ethos of Russian business as the potential merger of metal majors Rusal and Norilsk has been shelved. “Unfortunately, there’s a widespread feeling in business — and in the state, for that matter — that one should take advantage of the situation to take something from somebody,” he is quoted as saying to a forum in Siberia. “We want both government and business not to act to the detriment of their neighbors.” Well that’s nice to know!

Oleg Deripaska CEO and main shareholder of Rusal and Vladimir Potanin, largest shareholder of Norilsk got together with President Dmitry Medvedev as the owners tried to persuade the government they should swap billions of dollars of debt owed to state banks in return for the state taking a minority shareholding in the combined group. Not surprisingly they couldn’t agree on how to value the respective companies, or their debt. The government appears to have less appetite than originally thought for earlier ideas of partial or complete nationalization as a solution for heavily indebted industries’ economic woes. Indeed the government is now moving toward allowing major producers to sink or swim in the current conditions, probably in the belief that even if they go down someone will step in and pick up the pieces to keep the businesses a going concern. Both companies would probably be profitable if not for their massive levels of debt, particularly at Rusal. And the main losers in the event of corporate failure would be foreign (mostly European) banks as we recently covered.

Rusal’s position has been exacerbated because it bought a 25% stake in Norilsk for some $14bn, using debt to finance the purchase. At the time, November 2007, Rusal was riding high on aluminum prices over twice their cost of production. The story today looks somewhat different and reports vary in terms of the cost of production at Rusal’s Siberian smelters so a reliable estimate is not possible. But it is questionable if the company is profitable on an EBITDA basis at current ingot prices. The company is struggling to agree debt deferment and re-scheduling of an estimated $ 17bn owed to its creditors both domestic and foreign. Interest charges are almost certainly pushing them into the red and some estimates put the Fair Enterprise Value (the best that can be done with the murky numbers available) at less than the debt owed. Some believe the deal with the government was potentially the end game for Deripaska. If he couldn’t get Medvedev and more importantly the deputy PM Victor Sechin in charge of the deal to agree to the debt for limited equity swap he may have few other options. With the government playing hardball watch the next move. Kremlin officials are apparently curious to know what has happened to Rusal’s profits during the aluminum boom, Estimates of up to $10bn of proceeds appear to have been drawn by Deripaska since 2001. Murky indeed and probably set to get murkier still.

–Stuart Burns

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