Uralkali considers ending London listing

By bne IntelliNews June 24, 2015

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Uralkali, one of the world's largest potash producers, has indirectly confirmed recent reports that it might go private: after the board of directors meeting on June 23 the company said its audit committee would be "evaluating the benefits of listing of Uralkali’s GDRs on the London Stock Exchange".

The board meeting stirred particular interest because of the speculation that the company might delist in London and Moscow and merge with its shareholder, ammonia and nitrogen producer Uralchem. The recommendations on delisting will be ready by the end of August, a company press release said.

Uralkali is due to hold another extraordinary meeting on August 7. According to earlier reports, delisting from MICEX needs the approval of 75% of shareholders (main shareholders currently hold 77%, including treasury stock, 23% of shares are free floating). De-listing on LSE would only require the board's permission.

Uralkali's board on June 23 also reinstalled Sergei Chemezov as the board chairman, and Sir Robert Margetts and Dmitry Mazepin as deputy chairmen. Mazepin, who owns Uralchem with its 19.99% stake in Uralkali, is reportedly promoting the merger of two companies.

Less than sum of its parts

Analysts have warned that privatising the company may be the goal of the recent $1.12bn buyback of 11.56% of Uralkali's share capital, which doubled the treasury stock of the company to 24.16%. Sources cited by Vedomosti daily on June 22 said that the potash major might hold another buyback amounting to $1bn-$2bn, before delisting and merging with Uralchem.

However, Bloomberg reported on June 22 that ONEKSIM group, which holds 20% in Uralkali, is not interesting in merging the potash producer with Uralchem. The move made little sense because Uralchem's $4bn debt would dilute Uralkali's value, said the sources, adding that Mazepin was the main driver of the merger talks.

"Instead of one troubled company and one [that is] quite healthy, it will create something in the middle, while there is no operational synergy between the two. It will only be attractive for Uralchem as it may help to negotiate better refinancing," BCS Financial analyst Oleg Petropavlovsky told Bloomberg.

Fertiliser investors told Vedomosti that no production synergies are possible between potash producer Uralkali and ammonia and nitrogen producer Uralchem, which could bring an up to 20% reduction of the value of the merged unit. However, the companies could combine trading and marketing structures in the main markets of Asia and Brazil.

The potash market is becoming increasingly competitive, with a record global output of 63mn tonnes in 2014 and prices dropping more than three-fold since 2008 to around $300 per tonne.

'No point in holding stock'

On June 24, Uralsib Capital put its Hold recommendation on Uralkali's stock on review, although it was affirmed shortly before the BoD meeting with a target price of $16/GDR. The follow day Uralsib changed its course, saying in a note to clients that it “sees no reason to keep a stock that does not pay dividends amidst growing corporate and operating concerns”. 
Higher capex will weaken the dividend outlook, analysts wrote, while post-buyback corporate governance risks have grown as the post-buyback treasury voting stock grew to 24%. These concerns also led Uralsib to reduce Uralkali's target price by 25% to $12/GDR and downgrade the recommendation to Sell.
Despite a much worse outlook on the de-listing concern, Sberbank CIB on June 24 saw a major sell off of Uralkali's shares as unlikely, as the market is expected to wait for the second buyback proposal.

Renaissance Capital in a note to clients on June 24 suggested that Uralkali's equity value has become secondary to the management, which is moving its focus elsewhere. RenCap downgraded Uralkali stock to Sell from Hold, while lowering the target price by 30% to $12/GDR.

It also stressed that the fact that Urakali was significantly hiking its investment programme, abolishing the stated investment programme, carrying out a solid buyback, and publicly taking first steps towards LSE delisting was not accompanied by any meaningful explanatory efforts from the management. This might change the public perception of the company and erode the premium to international peers at which Russian potash major has historically traded, the bank noted.

"Uralkali’s medium-term aim has clearly moved away from being a true shareholder company that creates value and distributes it via dividends, to being a less transparent, more capex-oriented entity,” Vlamidir Sklyar of RenCap believes, adding that market would need to discount that when adding value.


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