Sergei Kuznetsov in Minsk -

Russian Machines (Russkie Mashiny), controlled by tycoon Oleg Deripaska, has withdrawn from negotiations with the Belarusian authorities over a possible acquisition of a stake in the Belarus' state-owned truck maker MAZ, according to bne sources. This leaves Russian state-controlled Russian Technologies (Rostekhnologii), which controls truck maker KAMAZ, as the only contender to buy MAZ.

"Russian Machines has been faced with complete rejection of all of its initiatives by the Belarusian side," a source close to the Russian company tells bne on condition of anonymity. He says that after unsuccessful attempts to enter dialogue with the Belarusian authorities throughout 2011, Russian Machines revoked its investment proposals and has withdrawn from talks over MAZ.

Russian Machines proposed to initially buy a blocking shareholding in MAZ from the Belarusian government. After that, the company intended to issue additional shares and increase its interest to a controlling stake. The next step would involve bringing in one of the world's leading truck makers to work with MAZ by selling a stake in it, though the Russian company never mentioned the name of any possible investors.

"The Belarusian PM disallowed the Belarusian part of the working group, which was created to negotiate the deal with Russian Technologies, to hold talks with Russian Machines. Also, the Belarusian government ignored the proposal of Russian Machines to have a tripartite meeting in Minsk with the foreign investor that Russian Machines was planning to engage in the project," the source says, commenting on the obstacles that the Russian company faced.

He adds that in December, the potential European investor said it had given up on its possible involvement in the MAZ deal because of the growing tensions between the EU and the Belarusian government over the deteriorating human rights situation there. Further, Russian Machines required additional finance to rapidly upgrade its Yaroslavl Motor Works (YaMZ) in 2012, meaning the money that could have been spent on MAZ was instead designated for YaMZ's modernisation.

The Belarusian government and MAZ officials have so far not commented on the talks with Russian Machines, though the bne source is certain the Russian company won't return to talks anytime soon.

Oleg Andreyev, chief M&A specialist with Alfa Bank in Belarus, tells bne that the Belarusian side never considered Russian Machines to be a serious contender for MAZ assets. "Everyone knew from the start that Russian Technologies, a large state-controlled structure, had a much stronger position in the talks over MAZ. The Belarusian side could be interested in Russian Machines' proposals only if Russian Technologies should for some reason withdraw from the talks. Then Belarus would have one more option. But it seems Russian Technologies is truly interested," he says.

Andreyev doesn't rule out that Russian Technologies might have used political pressure to thwart the negotiations with Russian Machines. "I can't rule out that Russian Technologies used administrative resources, and the Belarusian side was instructed not to conduct active talks with Russian Machines," he says.

Andreyev goes on to say that "price and "time factors" are key to the possible deal with Russian Technologies. "MAZ is losing the Russian market - it is not a very active process, but it is taking place. New investors come to the market - Volvo, Scania and MAN create new production there. Competition is bitter, and MAZ and KAMAZ should join efforts to feel more comfortable. It is to the best interests of the Belarusian side not to drag out the MAZ deal," Andreyev says.

Valuation maneuvers

Russian Technologies, therefore, remains the only possible investor to work with MAZ. As bne has previously reported, Belarus intends to establish a joint holding company Rosbelavto, which will later be given equal shareholdings in MAZ and KAMAZ for management. Previously, Belarus was able to contribute not more than 49% in MAZ. At the same time, Belarus and Russia intended to transfer to Rosbelavto stakes in some enterprises servicing the truck makers.

The deal itself and its format will largely depend on the valuation of the Belarusian producer, which has been taking unusually long. In 2011, Ernst & Young, hired to evaluate MAZ, said the truck maker was worth about $800m. However, the Belarusian authorities and Russian Technologies had agreed that should the Ernst & Young value differ more than 20% from that presented by a domestic company, a third valuator would be chosen - and that's what happened.

According to the bne source, Belarus held a competitive tender to choose an alternative adviser, but there were no serious bidders from the West or Russia. Eventually, one of the smaller Belarusian companies was chosen to value MAZ, but the results of the tender were later annulled, and the authorities came to an agreement with Ernst & Young to adjust its original value while factoring in MAZ's performance in 2011.

Alfa Bank's Andreyev believes that the adjusted valuation by Ernst & Young won't differ much from the original estimate. "MAZ was valued at $800m, and then the Belarusian government put the evaluator under pressure. Will Ernst & Young change its appraisal under this pressure? It won't, because it would be a bad blow to its reputation," he says.

Andreyev adds that the adjusted value of the company may take into account its 2011 performance, but the final figure won't be modified much, because "there were no fundamental changes in the market situation for MAZ."

The impact of the major devaluation of the Belarusian ruble in 2011 won't affect the estimate, being a force majeure event, he underlines.