Renault-Nissan finally takes the wheel at Avtovaz

By bne IntelliNews May 4, 2012

Graham Stack in Kyiv -

The Renault-Nissan alliance has finally signed off on a deal to take a controlling stake at Russian car giant Avtovaz. The alliance will invest $750m - double the market price for the stake it will receive - in what will mark the successful completion of state-led restructuring of the Soviet-era company.

The deal, which has been mooted for months, is structured as a joint venture between Avtovaz and Russian state corporation Russian Technologies, the main vehicle for the Kremlin's hands-on industry policy. Renault-Nissan will have a 74.5% stake in the joint venture on completion of the transaction in 2014, giving it an indirect 67.13% stake in Avtovaz. Russian Technologies will retain a blocking stake, which is seen positively by Renault-Nissan, since it promises access to cheap state funding. Part of the deal is for around $1.56bn in interest-free loans doled out to Avtovaz during the crisis 2008-2009 to be prolonged.

The deal is designed to provide a turning point in Avtovaz's fortunes. Until the state reasserted control over the plant in 2005, the dominant employer in Tolyatti - a city of nearly 2m - looked to be on the way out. Infiltrated on all levels by organized crime and with its main model, the classic Zhiguli, already thirty years old, it was unable to compete with foreign imports except behind protectionist tariffs.

The company also suffered from an opaque circular ownership structure as a result of the way it was privatized in the 1990s. It was owned by its subsidiaries, meaning director and de facto owner Vladimir Kadannikov had no incentive to modernize. The property structure however also offered the state an easy way in - simply by persuading Kadannikov to retire and replacing him with a state-appointed manager working for Russian Technologies under direct oversight of the Kremlin.

Russian Technologies' first move was to send in hundreds of riot police from Moscow to root out organized crime from the shop floor. Then the circular shareholding structure was broken up, allowing Russian Technologies and investment bank Troika Dialog to take stakes in the company and start looking for the foreign technology partner essential to turning the plant around.

Renault took a 25% stake in 2008 for $1bn, as Russia for a brief while became Europe's largest car market, with Avtovaz still the dominant brand. However, the financial crisis almost bankrupted the company, with only generous support from the state allowing it to survive. Now car sales in Russia are booming again, but with Russia set to join the World Trade Organisation, spelling an end to protectionist tariffs, Avtovaz will have to modernize to stay in the game.

However, the deal signed May 3 is only a memorandum of understanding, not a legally binding commitment, causing consternation for some. "The deal terms and details remain uncertain, given the absence of any official agreement and commitment. Therefore we think further developments, including the possibility of a tender offer to minorities after Renault-Nissan increases its holding to over 50%, are a source of concern," write Renaissance Capital analysts.

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