By John Helmer, Moscow
Russia’s competition watchdog believes that a merger between two of the country’s top steelmakers, Evraz and Severstal, is a “pipe dream”, and will veto it if it is attempted. The swift, explicit reaction from one of the Russian government’s top market regulators indicates there has been no preliminary signal from the Kremlin of backing for the merger, announced in a carefully contrived placement in the Financial Times of London yesterday.
Maxim Ovchinnikov, head of the industry department of the Federal Antimonopoly Service (FAS) told CRU Steel News today: “This purported merger is rather a pipe dream. We haven’t studied it in detail yet, but obviously such a merger will limit competition. Their combined output of longs, billet, pig iron and coking coal will take up over 50% of the Russian market, and so the antimonopoly authority will disapprove of this transaction.”
Ovchinnikov was responding to a claim published by Alexander Abramov, one of the control shareholders of Evraz and chairman of the company board. According to Abramov, the merger with Severstal would be “a good idea”.
In an interview withPeter Marsh, a reporter with a record of being comfortable on the receiving end of advertisements from Russian steelmakers, Abramov said: “I guess that this [the idea of an Evraz/Severstal combination] would have several advantages,” adding for the newspaper that there is a complementarity, rather than overlap or competition, between their business lines. According to the newspaper, “a link between the two companies would create relatively few overlaps given that Evraz’s main business is in construction and steel pipes for oil and gas, while Severstal has a stronger focus on flat steel sold to the white goods and car sectors.”
A combination of Evraz and Severstal would turn out an annual total of about 31 million tonnes of steel. According to a report by Alfa Bank steel analyst Barry Ehrlich, a merger “would put the combined company eighth in global ranking in terms of volume right behind Japan’s JFE (31.1mt) and Nippon Steel (35mt). The aggregate market cap of the new company could reach $17bn (if we assume Nord Gold will be successfully spun off)…Both companies have a strong US presence. At this stage, it is impossible to judge whether Abramov’s statement would lead to a real M&A transaction and what the timing and structure of the potential transaction would be. However, given that Mordashov was ready to merge Severstal with Arcelor in 2006 and in 2007 said that he would like to get involved in the consolidation of the Russian steel industry, while such ideas had always been rejected by Evraz, the merger does not seem completely unrealistic.”
The attempted merger between Severstal and Arcelor in 2006 — rejected by Arcelor in favour of Mittal Steel — was taken by Severstal owner, Alexei Mordashov, to then President Vladimir Putin for approval, which he gave.
There has been no sign of a comparable action, or approval, in this case. Severstal spokesman Natalia Ivanova declined to respond with her company’s comment.
Ehrlich added: “the merger does not seem completely unrealistic. Potential benefits from the merger may include costs synergies, SG&A cost reduction, a higher weight in the FTSE 100 if the merged company remains in the index (Evraz was recently included), and more power in price/supply negotiations.” According to Ehrlich, the merger claim should be “neutral for the shares of both Evraz and Severstal.”
However, in first-reaction trading on the London stock market on Tuesday, Evraz dropped 3%, while Severstal rose 6%. By the day’s close, Evraz stood at 362.5 pence, up 2% on the day. A day later, at the start of London trading, Evraz was 360p, down 1%. Severstal rose 4% on December 13 to $11.69 per share, but it too is falling today.
Moscow industry sources believe Abramov’s motive for planting his merger idea in public was to lift the share price and challenge his fellow shareholders in Evraz to buy him out. Abramov holds a 24% stake in the company, while the Millhouse holding of Roman Abramovich and Eugene Shvidler has 35%. Chief executive Alexander Frolov holds another 12%, while the free float is at 24.8%, below the threshold required for Evraz’s listing on the main board of the London Stock Exchange (LSE).
Abramov, Abramovich and Frolov are bound together in a longstanding agreement not to make significant share sales affecting control of the company without securing consensus. Earlier this year, they attempted to sell their stake in the coking coalminer Raspadskaya, only to be outwitted by their co-shareholders in the mine company, Gennady Kosovoy and Alexander Vagin, who announced that they too were selling out. Noone wanted to buy both groups of shareholders out at the demand price, and the proposed transaction failed.
This time Abramov may be taking a leaf out of Kosovoy’s playbook. He is quoted by the Financial Times as saying he is ready to sell his Evraz shares to lift the free float above the threshold, but not at the current share price which, according to Abramov, “is far too low.” As a control shareholder Abramov is not an independent board chairman according to the LSE rules, and must step down. He told the newspaper he will.
Abramov’s undertaking on this point may have been ordered by the UK regulator, the Financial Services Authority (FSA), as a condition of the latter’s approval of Evraz’s change of domicile from Luxemourg to the UK, and its application to be listed on the LSE main board. That occurred on November 7. This week Evraz has been admitted to the FTSE-100 index, and will be the only steelmaker included in the index for the time being. An Evraz statement has noted that Evraz has traded internationally through General Depositary Receipts since 2006 and since its admission to the LSE last month, is subject to a waiver issued by the UK Listing Authority of its 50% free floating share requirement to permit the move. According to Evraz management estimates, inclusion in the FTSE-100 index will result in additional inflows of around $200 million to $600 million from investment funds which track the FTSE-100 index.
Abramov told the Financial Times he has scant regard for the UK listing rules. “We [the company] could have found a nicely dressed person from the City who could do this job but I was informed this would not be a good idea from the perspective of our shareholders,” Abramov is quoted as saying. By shareholders Abramov meant himself.
Renaissance Capital steel analyst Boris Krasnojenov is dismissive of Abramov’s ploy in a report for clients, published today. The Rencap also notes that Evraz’s shareholders aren’t committed to steelmaking. “We are aware of market chatter that core Evraz shareholders are ready to sell their stake at a reasonable price. Speculation about further consolidation in the Russian steel sector has been fairly steady over the past five-to-seven years. However, we note two key factors that are slowing the process: (1) the Russian steel sector already has a high level of consolidation (six steel mills control c. 80% market share); and (2) all Russian steel mills are run by charismatic leaders who are committed to their businesses and keep controlling stakes (80%-plus) in their companies. Evraz seems to be the only exception, in that all core shareholders are portfolio investors; however, it is the largest long steel producer in Russia and falls under the definition of a strategic asset. Thus, Russian steel majors or industrial groups are the only realistic candidates for potential M&A developments with Evraz.”
According to Krasnojenov, “we expect direct approval or an indirect blessing by the government before Evraz would consider entering into potential M&A deals.”
For the moment, the Russian regulator is categorically opposed; and also less flexible towards Evraz than the UK regulator was last month. According to Ovchinnikov of the FAS, while the agency would reject the merger on its face, “the only way for them to get round is to appeal to Article 13 of the antimonopoly law.” This provision of federal law FZ-113 allows transactions “if their effect is or may be: (1) improvement of production and sale of goods or promotion of technical and economic progress or increase of competitiveness of Russian goods on the world market; (2) benefits (advantages) of the purchaser commensurate with the benefits (advantages) of the business entities as a result of actions (inaction), agreements and concerted practices and transactions.”
Moscow industry sources are skeptical that this can be demonstrated. They are confident there has been no Kremlin decision that it should.