By John Helmer, Moscow
In just a few hours this week, Rusal’s share price collapsed as a Bloomberg report confirmed what the stock markets have been suspecting for some time now – one of Rusal’s anchor shareholders might need cash so badly, he wants to sell his shares. According to Bloomberg, the requirement for quick cash comes to between $1.5 billion and $2 billion. That represents a sell-off of between 7% and 10% of Rusal’s 1.5 billion shares. On this news, published on Monday and Tuesday, the share price lost more than 10% of its value, dropping below last year’s IPO price of HK$10.80 to the lowest level this year.
This is how the damage materialized in the share trading on June 6:
Is the seller the Libyan Investment Authority and the Qaddafi family, whose secret stake of 217 million shares, for which they paid $302 million, was confirmed two weeks ago . Was it Nathaniel Rothschild (initial outlay $100 million for 72 million shares), John Paulson ($100 million for another 72 million shares), and Robert Kuok ($20 million for 14 million shares)? Or was it Oleg Deripaska and the syndicate of his silent creditors and co-stakeholders, who hold between them 48% of the company’s shares?
Bloomberg refers to this lot and the sources for the sell-off story as “two people familiar with the matter”. The original Bloomberg report of June 6 has now disappeared from view. The next day, Bloomberg said, “the stock dropped as much as 1.7 percent yesterday after two people familiar with the matter said Rusal may sell new shares equating to a stake of 7 percent to 10 percent, for a value of about [US]$1.5 billion to $2 billion. Rusal’s shares listed in Hong Kong slumped as much as 4.6 percent to HK$10.80 today. Investors expect the company to offer “a solid discount” if the offering goes ahead, Marat Gabitov, an equity analyst at Unicredit SpA in Moscow, said in an e-mailed report today. While the valuation range implies a discount of as much as 6 percent, investors could demand a higher one at the actual placement, Gabitov said.”
In the Moscow daily report from Unicredit on June 7, Gabitov claimed the share sale was intended to reduce Rusal’s hefty debts. “The proceeds,” he said of the secondary share placement (SPO), “would go to reduce net debt, which we would estimate at USD 9.4-9.9bn post-SPO or 2.9-3.0X 2011E EBITDA, as the company reportedly seeks to revive its M&A capability. As one would expect, the stock fell 4% overnight on the news to USD 1.40 [HK$10.92], as investors started to price in their expectations for the solid discount the company would have to offer at a potential placement. We note that although the valuation range implied by the news suggests a further discount of as much as 6%, investors could demand a yet higher discount at the actual placement.”
The Italian bank Unicredit is one of Rusal’s international creditors according to the IPO prospectus, with $307 million of exposure. According to Gabitov, Unicredit’s assessment is that “UC Rusal does not need to raise equity financing to reduce debt – although its current net debt stands at USD 11.4bn or 3.5X 2011E EBITDA, its finance costs should drop significantly following a series of loan refinancings that are due to be completed by September. UC Rusal’s head of capital markets, Oleg Mukhamedshin, said last week that the company could pay interim dividends as soon as in 3Q11, which seems to support our view that the current degree of leverage is comfortable for the company.”
To put a stock-price supportive rationale on the news, Gabitov theorized that “an attractive M&A opportunity could be the only reason for UC Rusal to pursue a potential new share sale, and we see [Alisher Usmanov’s] Metalloinvest as the likely target. The two companies created a strategic alliance to oppose Vladimir Potanin and Norilsk Nickel’s management in Norilsk Nickel’s board, while Metalloinvest has reportedly been ready to merge with a larger miner for a couple of years, with Kazakhmys and Norilsk Nickel previously mentioned as potential partners.”
Noone else has come up with the idea that Deripaska might be thinking of doing Usmanov a favour – and even if he were, $2 billion is well short of Usmanov’s minimum selling price. So why was an impeccably credible Rusal placement notice made on the Bloomberg wire?
Bloomberg invented the idea of blind sourcing for market manipulative and share price advertisements, starting in the runup to the Hong Kong Stock Exchange listing of Rusal in January of 2010. The more exaggerated the Rusal pitch, the more blind sources Bloomberg created for its published claims. These sources are called “people familiar with the matter”. They range from the exiguous “one person familiar with the matter” to the extreme “three persons familiar with the matter”.
Until this week. For the first time, the two Bloomberg sources familiar with this particular matter at Rusal have triggered a collapse of confidence in the company. The result is that Rusal was obliged to issue this statement on June 8:
“In response to recent press speculation, UC RUSAL wishes to clarify that the Board of Directors of the Company has not discussed any equity capital raising.
The Company has successfully reduced leverage ahead of schedule through strong cashflow generation and is in the process of discussing a debt refinancing facility with its banking syndicate. The proposed refinancing facility does not require any issuance of equity or sale of assets as a condition precedent.”
Supposing then that Rusal is telling the truth on June 8, just as it was on June 6, and that the international banking syndicate is not about to sell shares acquired during the IPO, or oblige the company to reduce its debt before the refinancing – why then did Rusal intend to announce the selloff? Among Deripaska’s erstwhile partners on the board of directors, chairman Viktor Vekselberg (with 16% of Rusal’s shares co-owned with Len Blavatnik) claims he isn’t selling, while Mikhail Prokhorov (17%) hinted that he might, but then Prokohorov often says such things if he can get his price. Glencore is almost certainly not ready to risk the profitability of its aluminium trading arrangement with Rusal by reducing its 8% shareholding in the company. So, as Rusal’s announcement claims, there is no need for the board of directors to formally consider or decide anything. That leaves open what Deripaska is thinking of doing on his own account.
Renaissance Capital has concluded that Rusal’s denial is less than credible, and that there remains a share overhang, because somebody wants to sell up to 150 million shares, and soon. According to RenCap analyst Andrew Jones, “we do not believe RUSAL needs to raise equity capital, due to its recent and proposed refinancing of short-dated and restrictive debt. However, given its rising cost base and high interest payments, we no longer expect deleveraging to continue as quickly as we had originally thought. As a result, we still believe the perceived overhang is likely to cap short-term upside until a cyclical upswing in cyclical names in 3Q11 can reverse momentum, or unless the proposed $3-5bn debt refinancing is completed as intended in 3Q11.”
That’s a lot of ifs – and a reflection of negative market sentiment towards Rusal’s financial future. Secret US State Department cables also corroborate the market speculation that Deripaska himself needs to raise cash for settlement of overdue personal debts. According to one classified State Department document, “Rusal serves as a good illustration of the GOR’s [Government of Russia’s] and major Russian corporations’ current approach to surviving in a globalized economy. Instead of sincere attempts to modernize and reform companies into efficient, transparent corporations, the goal is to restructure and extend debt, buying time until commodity prices rise and inefficiencies become less important.”