Restless NWR shareholders to vote on Ukrainian Ferrexpo deal

By bne IntelliNews October 20, 2008

Nicholas Watson in Prague -

The Czech coal mining group New World Resources (NWR) said Monday, October 20 that it's planning to call an extraordinary general meeting for its shareholders to vote on a deal to acquire a stake of 25%-plus one share in Ukrainian iron ore miner Ferrexpo at cost from its majority shareholder, the private equity vehicle RPG Industries. With shareholders restless after seeing their shares plunge about 75% from May's IPO price, it's lucky for NWR's board that the deal is so attractive.

This deal, like much of what happens with NWR, is a bit of a convoluted affair. On October 6, Ferrexpo announced that Fevamotiniko, a company belonging to Ukrainian businessman Kostyantin Zhevago, had reduced its ownership to 51% by selling a 20.8% stake to RPG Industries, the 64% owner of NWR, for 83 pence per share, for a total GBP101.6m. RPG then set about buying shares to bring its stake up to a blocking 25% plus one share, which brought the total cost, plus banking expenses, to GBP126.6m (EUR163.3m), or 86 pence per share.

RPG pulled off this opportunistic purchase, which was about 30% below Ferrexpo's market value at the time, because Zhevago, like many of his brethren at leading companies in Russia and the rest of the CIS, had borrowed heavily over the past few boom years using their once-pricey shares as collateral. As equity prices began to tank in September, the value of those pledged shares fell below the values agreed in the loan deals, triggering "margin calls." Suddenly forced to come up with the cash to make up the difference, Zhevago et al sold off assets at crisis prices.

In Zhevago's case, he had secured hundreds of millions of dollars from JP Morgan Chase last year to invest in other business interests and had secured the loan against his 72% stake in Ferrexpo. At the time of the loan, the shares were trading at more than GBP4 a share, but have since fallen to little more than 100 pence. Another famous victim of these crisis sales has been Russian uber-oligarch Oleg Deripaska, who was forced earlier this month to return a 20% stake in Canadian auto parts maker Magna to the creditors that helped fund the $1.4bn deal just a year ago. Bloomberg calculated that Russian billionaires lost more than $230bn as the combined wealth of Forbes magazine's 25 richest Russians dropped 62% from May 19 to October 6.

At a basic level, Ferrexpo's business remains strong despite the recent hoopla surrounding its share price. As NWR notes, "Ferrexpo has a robust balance sheet, controls 6.5bn tonnes of Joint Ore Reserves Committee resources plus approximately 14bn tonnes of further Soviet-classified resources in Ukraine and has an ambition to become Europe's largest iron ore producer."

"We are taking advantage of a unique market opportunity to secure a significant holding in Ferrexpo at an attractive valuation," Miklos Salamon, NWR's executive chairman, said.

If the price of the deal isn't open to question, then what about the logic?

Small change

On the charge that NWR is splurging valuable cash resources on assets outside of coal mining when the company's stated aim is to be a leader in the consolidation of Central and Eastern Europe's coal industry, NWR's chief financial officer, Marek Jelinek, told bne that the €163m price of acquisition has to be put in the context of the firm's balance sheet. "We are sitting on approximately €700m of cash and at the current rate of cash generation, we will be in net cash territory at some point next year, so it's not a significant amount of money. It's not going to change materially our ability to acquire other assets," he said.

Indeed, Jelinek said that the acquisition could actually help NWR's expansion into Ukraine's coal sector. "Ukraine is one of the most coal-rich countries in the region and partnering with such an excellent company as Ferrexpo may significantly enhance our chances of doing business in that country. This opens up huge strategic opportunities at an excellent purchase price."

Stanislav Kartavykh of Foyil Securities in Kyiv also believes that not only will Ferrexpo's share price rebound soon, but that the tie-up between the two firms makes sense. "Integration with NWR could bring benefits to the Bulgarian Kremikovtsi metal plant, which Mr Zhevago in the process of acquiring, by supplying coking coal along with iron ore pellets from Ferrexpo's main asset, Poltava GOK," he said.

NWR, a holding company of several mines and coking facilities including the Czech Republic's giant mining firm OKD, is primarily a coking coal producer - in 2007, the company sold approximately 13.1m tonnes of coal, with 65% of production being coking coal and 35% steam coal - so it makes sense to link the world's 12th largest producer of iron ore pellets with the one of the largest coking coal producers in Central Europe. Both firms are listed on the London Stock Exchange.

The financial and strategic logic of the link-up will no doubt smooth the deal's approval at the EGM, which promises nevertheless to be a spicy affair. Given RPG is the vendor of the stake, its 64% in NWR can't be used to vote on the deal, leaving the choice down to the holders of the 36% of free float shares. Many are in a restless mood.

NWR priced its IPO shares in May at CZK425.83. The shares soared as high as CZK620 before falling back to earth as oil and commodity prices fell. By mid-October, the shares had been beaten down around 75%. While NWR blames this on the global turmoil - certainly true - the firm's recent financial results revealed what many investors don't like about companies in the region. The biggest investor in NWR and RPG is the colourful dealmaker Zdenek Bakala, who is widely regarded as having pulled off one of the deals of the decade by doing a leveraged buyout of the coal miner for a reputed €400m-plus in November of 2004, then set about restructuring the company through selling off assets worth around €2bn, and then flogging off the remains to an eager market that valued the firm at €4.5bn. When the company announced its second-quarter results at the end of August, it revealed net profits that were some 40% below the consensus as employee bonuses and IPO-related costs soared. Analysts expect a similar dynamic in the second half, which could translate into a 37% increase in personnel costs for the whole year.

At a time when the global investment community is tightening its collective belt, such extravagance clearly angers many investors. However, with this Ferrexpo transaction, Bakala may be able to remind them that while the ride is sometimes bumpy, there are few better dealmakers around who can bring them the kind of rewards that emerging market risk should deliver.

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Restless NWR shareholders to vote on Ukrainian Ferrexpo deal

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