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evraz_ipo

By John Helmer, Moscow

During his lengthy testimony and cross-examination in the UK High Court, Roman Abramovich (below, left) claimed he couldn’t remember much about what taxes he paid. The judge believed him. That remarkable episode in the history of Russian taxation took place on November 5, 2011, at 3 in the afternoon.

Now Abramovich has presented the US Securities and Exchange Commission (SEC) with a prospectus for selling shares of the North American division of his steel company, Evraz. The document runs to 218 pages, and except for the minuscule print on one, Abramovich omits to say who he is, and how he controls Evraz. He glosses over one key word from his description of Evraz, and the big risk for shareholders in North America: that word is “Russia”.

Authors of this subterfuge are Citigroup and Goldman Sachs, who are the joint book-running managers of the offering. Abramovich (below left) and his bankers have been advised on what to say, and what not to say, by three lawyers – James A. McDonald (below, 2nd left) , Michael Zeidel (centre), and Marc Jaffe (right). The first two are from Skadden, Arps; the third from Latham & Watkins. Their commissions, fees and charges ought to be part of the prospectus, but for the time being they have been left blank.

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Citgroup also notes that it has a conflict of interest in the share sale because it is also an underwriter of part of Evraz’s debt called the “ABL Credit Facility”. The prime lenders of this are General Electric Capital Corporation, Bank of America, and UBS. The prospectus indicates that about $100 million is owed to them. .

Much of the Evraz debt, $771.9 million – borrowed when Abramovich decided to pay a premium for the North American assets now for sale – will be paid down out of the IPO proceeds. Moscow industry analysts and the market for share trades of the parent Evraz Plc believe that getting rid of the the rotten apples in the barrel has already helped the value of what’s left. According to Sberbank, “the idea of monetizing the North American operations is good, as the timing is favorable (steel demand in the western hemisphere remains robust) and it would help the company deleverage and unlock additional value (this business is now effectively valued at Evraz’s low multiples of4.4-4.6 EV/2014-15E EBITDA versus 7.0-8.0 averages for North American producers).”

Denis Gabrielik of Otkrite is more circumspect: “based on our estimates the equity value of Evraz North America could be valued at $1.3bn, and under these assumptions the proceeds from the IPO should amount to $325-455mn. If so, Evraz’s net debt ($6bn at the end of June) after the IPO should amount to c. $5.5-5.7bn, while the net leverage ratio would be 2.7-2.8x. It is worth noting that the likelihood that Evraz would pay a dividend after the IPO of its North American division is quite low, in our view. We believe that the upcoming IPO is already priced in to Evraz’s share price.
Hence we see this news as neutral for Evraz.”

THREE-YEAR SHARE PRICE TRAJECTORY FOR EVRAZ

evraz_3y
Source: http://www.bloomberg.com/

The best Evraz has been able to do in the market this year was a high of £1.46 on September 19; it has since fallen back to £1.26. At a current market capitalization of £1.9 billion ($3 billion), Abramovich has presided over the loss of £5 billion ($8 billion) since the start of 2012.

Noone is impolite enough to point out that at an IPO valuation for Evraz North America of $1.3 billion today, Abramovich has lost almost $4 billion from what he thought his North American acquisitions were worth. That is to say, Abramovich has obliged the Russian steelmaking assets of Evraz to subsidize the North American steel industry as the latter’s value has plummeted.

Abramovich’s business nous was publicly endorsed by President Vladimir Putin in March, at least against Igor Kolomoisky. But Putin was speaking ironically when he claimed Kolomoisky had “even managed to cheat our oligarch Roman Abramovich two or three years ago. Scammed him, as our intellectuals like to say” (emphasis added). It isn’t known what Putin thinks of Abramovich’s lossmaking record in the US – and whether he recently told him enough is enough.

When Evraz was raising fresh loans for its American debts in 2010, the issue documents provided a detailed picture of the $5.1 billion in asset purchases Evraz had made, starting with Oregon Steel Mills in 2007 for $2.3 billion; Claymont Steel in 2008 for $413 million, followed that year by the Canadian assets of IPSCO at $2.4 billion.

The loans raised to pay for those assets currently appear this way as long-term obligations for Evraz North America as of December 31, 2013:

payment_due

There are 14 plants in all — five in the US, nine in Canada. Reorganized operationally into three product divisions for flat steel, longs and tubular products, with a single Evraz brand name, EINA [Evraz Incorporated North America, a Delaware registration] says it is the largest rail and large-diametre pipe (LDP) producer in North America, with 3.9 million tonnes of rolled steel capacity, 2.7 million tonnes of melt shop capacity, and 2.1 million tonnes of pipemaking capacity.

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On the 2013 results, production has been running at 46% of the rolled-steel capacity, 49% of the pipemaking capacity. The figures for the first half of 2014 indicate even further reductions of output.

Claymont Steel, for which Abramovich paid $413 million, has been shut down permanently, unsellable. That story can be read here. In the 2013 accounts, the impairment for Claymont was $296.9 million.

For new American share-buyers, the good news from Evraz Incorporated Canada (EICA) and Evraz Inc. North America (EINA) is that they combine to be “a leading North American producer of engineered steel products for the rail, energy, and industrial end markets. We are the largest producer by volume in the North American rail market and in the North American LD Pipe market, with estimated market shares of 39% and 47%, respectively, in 2013. We also held leading positions in the Western Canada OCTG, SD Pipe, and West Coast plate markets in 2013.”

The bad news is that the combination is losing money. In 2013, after selling 2.5 million tons (US short) of steel products, sales revenue came to $2.8 billion. Earnings (Ebitda) came to $176 million, but after writedowns of lossmaking plants, the bottom-line loss for the company was $709.3 million. The best, perhaps the only chances for an improvement in the company’s financial position are that there will be increased demand for oil and gas drilling in the US and Canada, especially in fracking and oilsands projects; and that the US Government will impose penalty duties on imported pipes, including those from Ukraine. That second chance hasn’t materialized, for obvious reasons.

That Abramovich and Evraz are Russian isn’t obvious from the prospectus, neither before the IPO, nor after:

evraz_ipo_before_after
Source: https://www.sec.gov/ Pages 9, 41, 42.

Nor is the Russian identity of both made clear in the summary of risks presented on page 7, or its expansion at page 17.

At the bottom of page 29, the lawyers and bankers finally concede that because the company will continue to be majority-owned (65%-75%) by Russians; because its raw materials come from Evraz steelmills in Russia, and because its debts are owed to Russian companies, economic warfare between the US and Russia might become a value hazard.

“As a significant portion of our slabs are sourced from outside the United States, if we were to depend on a significant portion of our products qualifying for use in stimulus funded projects under the ARRA, and our steel products did not qualify by virtue of our having sourced slabs from outside of the United States, it would adversely affect our business, financial position, and results of operations. Further, should the United States Congress determine that steel products furnished to the Department of Defense are required to be manufactured from United States made slabs, this could also adversely impact our armor or plate business.”

The value of the Russian slabs and vanadium to the North American company, according to the prospectus, has been $392.8 million, $408.9 million, and $288.1 million in 2011, 2012, and 2013. That’s between 12% and 16% of cost of sales; about two-thirds of the slab requirement.

Then the nub of the current problem: “Sanctions by the United States, Canada and European Union governments against certain companies and individuals in Russia and Ukraine and possible counter sanctions by the Russian government may hinder our ability to conduct business with potential or existing vendors of slabs in these countries and may otherwise have an adverse effect on us. We currently acquire a portion of our slabs from NTMK [Nizhny Tagil]. NTMK, EGSA [Evraz Luxembourg] and other EGSA affiliates have substantial operations in Russia. Recently the United States, Canada and the European Union have ordered sanctions against certain prominent Russian and Ukrainian officials, businessmen, Russian private banks, and certain Russian companies in response to the situation in Ukraine and Crimea. While we believe that these sanctions currently do not preclude us from conducting business with NTMK or EGSA’s other affiliates, the sanctions imposed by the United States, Canada or the European Union governments may be expanded in the future to restrict us from engaging with NTMK or EGSA’s other affiliates.

“In addition, it has been reported that the Russian government is considering implementing counter sanctions in response to the sanctions implemented by the United States, Canada and the European Union. Although the scope of any such sanctions is uncertain and is subject to finalization and approval by the Russian government, it has been reported that such sanctions may restrict the ability of United States and Canadian companies and individuals to do business in Russia or with Russian companies. If such sanctions are adopted, they may have an adverse effect on our ability to purchase slabs from NTMK and may otherwise affect our ability to conduct business.

“If we are unable to conduct business with existing vendors of slabs (including our affiliates) our business could be adversely affected. Meanwhile we further note that despite potential negative impact from such slab supply interruptions, we do not expect them to have long term effects on our business as relevant slabs supplies can be replaced in full from other sources.”

abramov_frolovTo find Russia, you have to go to the footnote at the bottom of page 112. There it is acknowledged that Abramovich is the control shareholder of the Evraz group, with a larger bloc of shares than anyone else: “Evraz Group S.A., a company organized as a société anonyme under the laws of the Grand Duchy of Luxembourg and wholly owned subsidiary of EVRAZ plc. Evraz Group S.A. does not have different voting rights. EVRAZ plc is a public company in the United Kingdom and traded on the London Stock Exchange. Based solely on EVRAZ plc’s 2013 annual report, Lanebrook Ltd., is the majority shareholder of EVRAZ plc and holds a direct beneficial ownership interest of 63.46% in EVRAZ plc. According to publicly available information, Lanebrook Ltd. is owned by (i) Roman Abramovich, who holds an indirect beneficial interest of 30.99% in EVRAZ plc, (ii) Alexander Abramov (right, top), who holds an indirect beneficial interest of 21.55% in EVRAZ plc, (iii) Alexander Frolov (below), who holds an indirect beneficial interest of 10.76% in EVRAZ plc, and (iv) Eugene Shvidler, who holds an indirect beneficial interest of 3.07% in EVRAZ plc. Kadre Enterprises Ltd. is a minority shareholder and holds a direct beneficial ownership interest of 5.69% in EVRAZ plc. According to publicly available information, Kadre Enterprises Ltd. is owned by Gennady Kozovoy who holds an indirect beneficial interest of 5.69% in EVRAZ plc. Verocchi Ltd. is a minority shareholder and holds a direct beneficial ownership interest of 5.63% in EVRAZ plc. According to publicly available information, Verocchi Enterprises Ltd. is owned by Alexander Vagin who holds an indirect beneficial interest of 5.63% in EVRAZ plc.”

The Kozovoy-Vagin stakes have been held since they sold out of the coking coalminer, Raspadskaya, in October 2012.

The shareholdings of Abramovich, Abramov and Frolov are also identified at Evraz, the parent company’s website.

At his Millhouse holding, Abramovich was asked two questions: “Taking into account Mr Abramovich’s assets in the US, and his interest in the pending EINA IPO, as well as his interests in Ukraine, what statements, if any, has Mr Abramovich made regarding the US sanctions against Russia, and regarding the Ukraine conflict? Also taking into account Mr Abramovich’s interests in professional football, what statements, if any, has Mr Abramovich made in relation to US and European threats, including a recent threat by Prime Minister [David] Cameron, to sanction Russia by cancelling the award of the World Cup 2018?” Abramovich’s spokesman responded: “we have no statements on those issues.”

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