Who will be the winner from the Norilsk Nickel Russian roulette game?

Who will be the winner from the Norilsk Nickel Russian roulette game?
Rusal CEO Oleg Deripaska wants to play Russian Roulette for control of Norilsk Nickel.
By Ben Aris in Berlin February 26, 2018

Presidential elections are less than a month away so it's a strange time for Russia’s top oligarchs to be showing off how rich they are, but that is what is happening in the escalating fight for control of metals giant Norilsk Nickel.

A boardroom battle for control of Norilsk broke out again about a week ago when Vladimir Potanin, the largest shareholder with 30.4% of the company via his Interros holding, offered to buy a 6% stake that belongs to fellow oligarchs Roman Abramovich and Alexander Abramov, who currently control the Evraz steel company.

The problem is that Oleg Deripaska, who owns power company EN+ and aluminium producer Rusal, objects to the deal and filed an injection with the London High Court to stop it. Rusal owns 27.8% of Norilsk.

Deripaska is Abramovich’s protégé and a junior oligarch as he rose to prominence in the Putin era, while the other businessmen all became rich in the Yeltsin era. He already clashed with Potanin in 2012 over control of Norilsk but that dispute was settled by the Kremlin and Abramovich was brought in as peacemaker and given his stake as part of the deal.

The fight has been escalating for a week and Deripaska is now threatening to use the company’s shareholder agreement to force a game of Russian roulette on the participants.

Under the terms of the agreement either Rusal or Interros can offer a buyout of the other's shares based on its average half-year share price plus a 20% premium. The other side can then either agree to sell or make a counter offer which must be accepted. A source close to Rusal says the company is willing to offer Interros between $10.8bn-$13.9bn for its stake, or sell its own for more than $13.9bn.

The key question in the stand-off is whether Rusal can make good on the scenario where it would have to come up with the money to buy Interros out. The company is heavily in debt and that level of new financing is high, even for Russia’s biggest state-owned banks, which would have to be the source of the money as Deripaska is under US sanctions.

Other Rusal sources say they are confident they can tie down the funding necessary for a buyout. Glencore, which purchased a stake in Rosneft in 2016, has been a traditional partner for Rusal and is an alternative source of funds.

The whole saga is starting to become intensely political as other sources report that former Yeltsin Chief of Staff Valentin Yumashev may step in as peacekeeper in Roman Abramovich's stead. That would be ironic as Yumashev is a core member of the Yeltsin era clique known as the Family, in which Abramovich and Yeltsin’s daughter Tatiana were other key members. At the same time Deripaska is married to Yumashev’s daughter (although there are rumours of a divorce) making the whole affair very incestuous.

Analysts are speculating about what will happen next and also why this whole fight has been allowed to go so public at a rather sensitive time in the political calendar.

The Kremlin is clearly preoccupied with the elections at the moment and doesn't seem to have the spare capacity to deal with uppity oligarchs. But in addition to that President Vladimir Putin is generally believed to have withdrawn into a small inner circle and is tired of dealing with the day to day management of the economy. That has given his close associates a free hand to expand their empires without being slapped down by Putin as happened in 2012 when the dispute over Norilsk first flared up.

Analysts still believe Deripaska won't pull the trigger in the first round of Russian roulette as they don't believe he can come up with the necessary money to buy Abramovich’s stake.

“We regard an actual sale as highly unlikely as the required financing ($11bn-15bn) looks excessive even for the state-owned banks, and would require political will, which, in our view, is uncertain,” Andrey Lobazov, an analyst with Aton, speculates.

The deal could be made even more expensive if the stake belonging to either of Rusal or Interros rises above 50%, as that would trigger a mandatory obligation to offer to buy out minorities, which could double the price, says Lobazov, who goes on to lay out the various scenarios.

Scenario 1: Rusal Acquires Interros’s Stake

Raising a hefty $11bn-15bn from state-owned banks is a big deal and would require the government’s approval. The sum is too big to be raised internationally, Lobazov argues, while finding a foreign partner such as Glencore would likely also require the state’s approval given Norilsk’s strategic importance. Rusal had $7.6bn of net debt as of end 3Q17, implying a 3.9x net leverage ratio (net debt as a multiple of ebitda).

If Rusal could come up with the money, the bid would be good for Interros, which would receive a huge wad of cash. Vedomosti speculated the deal would be done at a share price of $25-$32/GDR, which means Interros would receive $12.0bn-$15.4bn from the sale. The six-month average price with a 20% premium (as per the agreement), is lower at $22.1/GDR, and implies a possible $10.6bn bonus payment if Rusal buys the whole 27.8% stake.

And the deal is bad for Rusal, which would see its debt increase massively. The company’s combined net leverage ratio could rise to 3.9x-4.8x. Rusal would consolidate Norilsk and its ownership would increase to 58.2%, triggering a mandatory buy out offer to minorities.

“Depending on the price, the net debt of the combined company would increase to $23bn-$28bn ($7.6bn of Rusal + $5.5bn of Nornickel + $11bn-15bn of new debt from the acquisition),” says Lobazov.

However, analysts say that if the money to finance the deal can be found Rusal could cope with the debt. The combined consensus ebitda for this year is $7.7bn, implying a 3.1x-3.7x net debt to ebitda ratio, “which we regard as manageable,” says Lobazov. Adjusting both Norilsk’s debt and ebitda for the non-controlled interest (around 42%), the combined net debt would stand at $21bn-25bn, and ebitda at $5.4bn, implying an effective net leverage ratio of 3.9x-4.8x.

Scenario 2: Interros Acquires Rusal’s Stake

Since the signing of the peace treaty, Interros has received approximately $4bn from Norilsk in dividends (on top of proceeds from the buybacks which preceded the shareholder peace agreement).

“As per publicly available information, Interros spent very little on the acquisition, which included around $0.5bn for the retail and pharmacy businesses. Consequently it should in theory have recorded a $3.5bn net gain in cash. Interros’s balance sheet capacity is unknown, but our impression is that it would be able to raise funds somewhat more easily. Nonetheless it would still require a strong helping hand from the state-owned banks, in our view,” says Lobazov.

In this scenario the deal would be good for Rusal which could pay off its debts from the $11bn-$14.1bn in cash it would take out and the proposed prices imply a $2.5bn-$5.5bn premium to the stake’s current market value. The cash injection should give the firms shares a big bump up, say analysts, as it would be left with $3.4bn-$6.5bn net cash positive.

However, what happens to Interros are not clear as no one is sure how much money the company has.