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By John Helmer, Moscow

When a man of quality like Robin Lane Fox finds beauty in a row of cabbages, it’s churlish to do anything but admire his acuity and taste. And if the cabbages are in the kitchen garden of Jacob Rothschild, the 4th Baron Rothschild (left) and father of Nathaniel Rothschild (right), let the vegetables not be blamed for the manure which enriches them.

Think of Kenilworth and Theobalds, greater gardens than Rothschild’s, but more than 450 years old, and though no longer surviving, of much the same type. They were intended by Robert Dudley (Earl of Leicester) and William Cecil (Lord Burghley), the courtiers of Queen Elizabeth I, to entertain her with glorious displays of wealth whose origin came from corrupt concessions they devised, and she authorized. The more costly the gardens, the more entertained the Queen, the more cash required to keep the beds in flower and fountains squirting, the more fickle the Queen’s favour, the more compliant the courtiers were obliged to be. This is how kingdoms are managed – and how gardens launder dirt.

Senior and Junior Rothschild aren’t in the same class, hard though the Financial Times recently tried to deck Junior with wreaths like “geopolitical nous”, “sense of daring”, “obsession to create more and more wealth”, and “friend of Russian aluminium magnate Oleg Deripaska”. Noone who has observed Junior and Deripaska on their roadshows can doubt who is the Queen, and who the courtier.

So it was to be expected that when Deripaska was softening up the board of Norilsk Nickel for the sale of Rusal’s 25% stake in Norilsk Nickel, Junior, a minor investor in Rusal and chairman of the board of one of Deripaska’s holding companies, should try to make the game look like a genuine bargaining match.

The stake is worth “conservatively $15 billion, and arguably a great deal more,” Rothschild claimed in a written message to Bloomberg, another of Deripaska’s promoters. Norilsk should “comfortably” produce $9 billion to $10 billion in earnings before interest, tax, depreciation and amortization next year, Rothschild added: “On an even modest multiple of six, the business is worth $54 billion to $60 billion. Norilsk is trading at an approximate 40 percent to 45 percent corporate-governance discount.” Never mind that Rothschild’s arithmetic falls short of Norilsk Nickel’s current and projected earnings, and that Deripaska agreed to an acquisition value for the stake in November of 2007 of $14.2 billion: the point is that Rothschild is employed by Deripaska to do the one horticultural job Junior has managed to learn from his father – gilding the lily.

Late yesterday evening, in the absence of official statements from either the Rusal or the Norilsk Nickel board, it was disclosed to the press that Deripaska wants $16 billion for the shareholding, and won’t sell unless he gets it. The new number represents a 51% premium on Norilsk Nickel’s current market capitalization. It is 13% above the acquisition price. And it is 7% above the script Deripaska gave Rothschild to broadcast a week ago.

Deripaska’s demand is also higher than Rusal’s other oligarch shareholders, Mikhail Prokhorov and Victor Vekselberg, have intimated they are recommending the Rusal board accept. Bank of America Merrill Lynch – reported by Reuters to be engaged this week by the Rusal board to value the 25% stake — issued a public valuation on November 29, calculating that at the top of the fair value range, the stake is worth no more than $14.5 billion.

At $16 billion, Rusal’s stake in Norilsk Nickel would be worth more than most of the company’s aluminium business – 66% of Rusal’s current market cap of $24 billion.

The immediate reaction to the news that Rusal has refused to make the deal was heavy selling pressure on the Hong Kong Stock Exchange. In Wednesday morning trading, the share fell 3.2% to HK$11.80, the largest intra-day decline since the share price took off in mid-November on the expectation that the sale of the Norilsk Nickel shareholding would eliminate the company’s massive debt. This is despite earlier warnings from Morgan Stanley and other investment banks that Rusal’s prospects look sickly compared to Norilsk Nickel, and that it would be better off keeping the dividend stream from the healthier Norilsk Nickel, as the price growth for nickel looks considerably more promising next year than it does for aluminium. In afternoon trading the share price recovered to HK$12.06.

“We expect the aluminium market surplus to persist next year, which will continue to put pressure on the metal price at least until early 2012,” warned Morgan Stanley in a report on Rusal on November 2. “Given the [Rusal] stock’s high sensitivity to aluminium prices (the correlation has averaged 89% since the IPO in January 2010), for every $10/t increase/(decrease) in the aluminium price, UC Rusal’s share price rises/(falls) by HK$0.14, on our numbers.” Arguing that nickel, copper and palladium – the metals which Norilsk Nickel produces – will perform much better than aluminium next year and the year after, Morgan Stanley calculated that by hanging on to its Norilsk Nickel stake rather than selling, Rusal would neutralize the risk of downward pressure on its share price from falling aluminium. “We consider the investment in Norilsk Nickel value-accretive for UC Rusal. We estimate that the stake in Norilsk Nickel and the company’s 25% dividend pay-out ratio will more than offset UC Rusal’s high interest payments. UC Rusal benefits significantly from Norilsk Nickel’s solid cash flow generation. We estimate UC Rusal will receive over $300mn of dividends annually from Norilsk Nickel (based on a 25% pay-out ratio) and recognize over $1.5bn of additional profit on its P&L (as part of the share of profits of associates), which more than offsets high interest payments.”

In a more recent report, Deutsche Bank reversed this logic, arguing that the only way Rusal can break out of its dependence on forces beyond its control is to clear off its debt, and start producing more metal from lower cost sources, grabbing an even bigger global market share than it presently claims. In its report of December 22, Deutsche Bank announced: “We believe that financial leverage and liquidity have held Rusal back. Norilsk’s bid for Rusal’s 25% in the company represents, in our view, a significant de-risking for Rusal. All other things being equal, accepting the bid would increase our target price to HKD13.5, and there may be more upside.”

This morning, it’s goodbye to the upside. Since the market believes the demand for $16 billion is a deal-killer, and the Rusal share price is collapsing, does Junior know what Deripaska’s game is, and could he stop the rot if he did? The Norilsk Nickel leak to the press is that it cannot afford a repurchase price of $16 billion without inflicting financial damage on itself. The implication is that Deripaska is trying extortion.

However, deals of this size in Russia cannot be agreed without direct and indirect undertakings and approvals of senior Russian government figures. And since they control the flow of state bank cash which is sustaining both Rusal and Norilsk Nickel, Deripaska’s game may be nothing more than a pitch for another state bailout. This one, like those which have flowed into Deripaska’s empty pockets since the collapse of autumn 2008, is not something the Rothschilds are privy to.

Junior’s latest recorded statement is a complaint that Norilsk Nickel’s board should not be offering to buy back its shares from shareholders at the premium price Deripaska has refused, in case the shareholders accept the offer and sell. Not enough, claimed Junior, amounts to “as much as $1 billion of value destruction.” Rothschild’s ability to count value on behalf of other shareholders, as distinct from counting for himself, has been called in question more than once. The last prospectus he issued in London, for example, warned six months ago: “Investors are cautioned that the track record for Mr. Rothschild may be greater or lesser than his actual total income and returns during the period. The track record is presented for illustrative purposes only and Investors are cautioned that such historical results for Mr. Rothschild may not be indicative of the performance of an investment in the Company”. Link

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