Kremlin happy as Norilsk split brings new power baron

By bne IntelliNews April 12, 2007

Ben Aris in Berlin -

Most wives would do the same. After one of Norilsk Nickel's major shareholders Mikhail Prokhorov was arrested in France this January, accused of importing dozens of prostitutes for wild sex parties at the exclusive ski resort of Courchevel, he agreed to an amicable divorce with his long-time business partner Vladimir Potanin.

The deal is that Potanin will buy Prokhorov out of their cash cow Norilsk Nickel, while Prokhorov will take over their investments in energy assets and build them into an energy giant. The energy assets will be gathered into a new holding, some of which are currently held by Norilsk, others by the shareholders Potanin and Prokhorov directly.

Mikhail Prokhorov

There are two types of energy asset in the current holding company Interros. The first are those that are core to Norilsk's business under Norilsk Power, such as the Noilskgazprom utility that powers the city, which will remain with Norilsk. Prokhorov will take the rest, including the 3.5% stake the two are thought to have built up in the federal power utility United Energy Systems worth about $2.2bn at current prices, and the recently acquired majority stake in regional generating company OGK-3 for which they paid over $3bn. Rob Edwards a metals analyst with Renaissance Capital estimates that the Norilsk energy assets account for $28 of Norilsk's current $200-plus share price.

The deal has yet to be signed and talks are hung up over money. Prokhorov and Potanin bought Norilsk for $270m in the mid-1990s, which is now worth $32bn. A good deal, but it creates a problem for Potanin as he doesn't have enough cash to buy Prokhorov out.

Divvying up the spoils

The two men each hold 25% of Norilsk split evenly between two holding companies that were set up in 2003: Potanin owns Bektanco Holdings Co. Limited and Pharanco Trading Co. Limited, while Prokhorov owns Dimonsenco Holdings Co. Limited and Rinsoco Trading Co Limited, each of which hold 12.5% of Norilsk, according to documents they submitted to US authorities during their take over of the US Stillwater Mining company in June 2003. Their holding company Interros owns another 6-12% according to various reports. The rest is free float owned by a few big international portfolio investors and minority investors.

Potanin will cede their gold mine Polyus Gold and the UES stake to Prokhorov as well as the other power assets, worth about $12bn in total. However, this still leaves Potanin $4.5bn short.

Analysts estimate that Potanin probably only has one or two billion in cash. He has tied up a lot of his capital in things like his listed real estate company Open Investments, Agroprom - a big agricultural holding (and a proxy for land ownership)- and Rosbank.

"Potanin will be left holding 53% of Norilsk worth about $16bn and that will generate an EBITDA of $10bn this year so he should have no problems raising the money from the international capital markets. Big international banks will be happy to lend to a company like this," says Edwards.

Once the money question is solved, the deal should go through quickly and analysts are expecting the transaction to be completed by the end of this year. The Russian law was recently changed to make it much easier to spin things off. When Polyus was spun out of Norilsk in 2006 it took about three months before it was tradable. Under the new rules, there is a one-off dividend payment in the form of shares and the new company can be traded immediately.

Keeping the Kremlin happy

So why did this happen now? The Courchevel affair was the trigger, but people close to Norilsk's management say the split has been on the cards for some time.

Born in 1965 in Moscow, Prokhorov graduated form the Moscow Finance Institute and went to work as the department head of the International Bank of Economic Cooperation, a prestigious Soviet-era bank to promote cooperation with other countries. Like Potanin, Prokhorov made useful international contacts at this job as well as building a foundation of government contacts.

In 1992 he moved to the private sector and went to work for Potanin's International financial company (MFK) before becoming the president of Uneximbank in 1993. After the crisis in 1998, he took a new job as a board member of Interros and became the president of the board of directors at Rosbank in November 2000. The following year he quit all his other jobs to concentrate on Norilsk.

Potanin has been the public face of the company and one of the seven classic oligarchs of the Yeltsin-era. While Potanin is credited with coming up the idea for the now infamous loans-for-shares deal that was the making of the oligarchs, it was Prokhorov that actually brought the deal off. Exciting times. And that's what's wrong. Prokhorov, like most of Russia's leading oligarchs, is essentially an entrepreneur and not a manager. Running Norilsk has turned into a desk job and Prokhorov got bored. He wants to get back into the game as all he does now is make a great deal of money.

The new Norilsk CEO, Denis Morozov, is a Potanin man and has been the point man in Norilsk for the last five years or so in charge of business development and legal affairs. The market regards him more as Potanin's man than a Norilsk man or even a metallurgical specialist. He is considered to be competent and capable of running the company. His appointment also shores up Potanin's control over the company and breaks Prokhorov's influence, so this is a true separation of powers by the two men.

Analysts seem pretty happy with the separation of the metal and energy assets, but the whole affair has proven to be a bit of an embarrassment for the Kremlin. Embarrassingly, President Vladimir Putin gave Prokhorov a medal only two weeks before his arrest in France to reward him for being a good corporate citizen. According to a source close to the company, Putin personally called Prokhorov while he was still in jail in France to chew him out for his unseemly behaviour.

But at the same time the Kremlin is happy to see yet another oligarch turn their talents and considerable resources toward the power sector. With demand for power only slightly shy of generating capacity, the Kremlin has left it a bit late to start building new generating capacity if economic growth is not to be stymied as soon as next year by brown- and blackouts. Prokhorov follows the Kremlin's golden boy Oleg Deripaska into ramping up what were at first speculative investments in power into a strategic investment for their groups. And Prokhorov is the first oligarch to make power his main business.

Sergei Danskoi, utilities analyst with investment bank UFG, believes that this will benefit the company: "The sum of the parts will be greater than the whole. At the moment the utilities assets are lost in the Norilsk Nickel structure, which reacts only to the price of nickel. However, once separated, the value of the energy assets can be realised."

UES intends to construct 41 gigawatts of new capacity in the next five years at a cost of $118bn - twice all the new capacity built in the last 15 years and half of this will be privately financed. So Prokhorov is going into strategic sector at a very opportune time. Plus he goes with real money of his own and the ability to raise more from international banks so this all suits the Kremlin very well indeed.

The medal and subsequent ticking off Prokhorov from Putin only goes to highlight the Kremlin's changed attitude to big business and the informal industrial policy it is pursuing. One-on-one meetings between Putin and oligarchs have become a regular feature of life as the Kremlin attempts to turn the concentration of wealth in Russia to its advantage. Oligarchs are now expected to support the state in its strategic goals with money and their organisational skills. Prokhorov's ticking off is more than Putin being prudish; the oligarchs have become de facto ministers, appointed by their wealth and business acumen.

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