By John Helmer, Moscow
Among Russians Egorova and Egorov are pretty common names, second only in circulation to Ivanova and Ivanov. That puts it up in the ranks of the Smiths and the Browns.
If there really is a litigant named Elena Nikolaevna Egorova; if she owns a minuscule bloc of shares in Magnitogorsk Metallurgical Combine (MMK), and if she really did think up herself and is funding her case against MMK in the Chelyabinsk regional arbitrazh court, she should be talking to the worldwide business press right now. After all, the injunction she won in court on March 30 — revealed yesterday by an announcement from MMK—has stopped MMK from proceeding with its $569 million takeover of junior Australian iron-ore prospector Flinders Mines. But the Egorova blockbuster is bigger than that. The share price of Flinders Mines has collapsed by 20% on the Sydney Stock Exchange, losing A$100m ($98m) in a day. MMK’s share price has lost less proportionally, but its market capitalization is down almost $400m over the past week. That makes a total of around $1.7 billion in value lost on account of the Chelyabinsk court case.
So who is Plaintiff Egorova of Siverskoye, Chelyabinsk?
The archive of arbitrazh court cases is accessible by internet, and the case file in Egorova’s case can be read here . There are two rulings, both dated March 30, and both signed by Judge N.A.Bulavintseva. The first makes no determination on Egorova’s application but instead sets out the procedural and evidential requirements for both parties at the next scheduled hearing on April 25.
The second ruling by the judge confirms the need for the urgent freeze on the Flinders Mines deal. “Interim measures,” ruled Bulavintseva, “are allowed at any stage of arbitration process if rejection of these measures can complicate or make impossible performance of the judicial act, including if performance of the judicial act is supposed outside of the Russian Federation.”
The judge’s ruling cites statutory authority for granting the injunction to halt MMK’s acquisition on the ground submitted by Egorova that it “will lead to reduction of the market stock value belonging to the claimant.” The urgency of the order is warranted, the judge wrote, because of the “probability of causing to the applicant of significant damage in the event that interim measures are rejected”.
MMK’s announcement  intimates that Egorova went to court with her claim, and was assigned a hearing date last Thursday, without official notification to MMK. Not even a leak from a friendly judge or clerk in the region which Victor Rashnikov, the MMK owner, dominates almost as comprehensively as he does his steel company and his company town Magnitogorsk.
But assuming that Egorova managed her ex parte application, as the court file suggests, and that Judge Bulavintseva deliberated for a day before issuing an injunction, blocking the completion of MMK’s takeover of Flinders Mines, it is MMK’s version of events that it was kept in the dark about what was happening in court until Monday, April 2, when it received a letter from Egorova herself.
The MMK announcement quotes either from the letter, or Egorova’s submission, or from the court documents now available to the effect that she challenged “the legitimacy of the OJSC MMK Board of Directors’ resolutions with respect to the acquisition of 100 percent stake in Flinders Mines Limited… The plaintiff argues that this transaction discriminates against her interests as a shareholder since this deal will, allegedly, lead to financial and operational risks for OJSC MMK and therefore adversely affect the plaintiff’s investments in MMK shares.” The company added that it “has been acting in full conformity with applicable laws and regards the plaintiff’s action as ungrounded.”
If that’s how Egorova thinks, it is surprising that after inflicting $1.7 billion worth of damage and trouble on Rashnikov, she wouldn’t step forward and speak for herself, instead of letting MMK doing the talking for her. She could telephone Bloomberg, for example, and ask to be identified as a person familiar with the matter. But so far Bloomberg is reporting only what MMK says about her. Egorova could have given Vedomosti a bell instead. But the Moscow newspaper was as much in the dark on Monday as MMK purports to have been. It reported that day that the MMK spokesman had said “MMK’s shareholders have also approved [the takeover].”
Egorova not only hasn’t telephoned Kommersant; she’s been hiding from it. According to the newspaper, it has tried to find her and cannot.
Elena Evstigneyeva, MMK’s press spokesman, wasn’t taking calls on Monday, she explained, because she wasn’t in the office. As soon she returned to the office, she promised to respond, but she didn’t.
MMK’s fumbling doesn’t by itself mean that Egorova is a stooge for the company to find a way out of the Flinders Mines transaction without revealing that Rashnikov himself has decided to withdraw. One line of speculation claims the court action is a delaying tactic because Rashnikov needs more time to raise the money for closing the deal.
There is also speculation that Egorova’s move is a greenmail attempt, and that in time she will be bought off, and the deal proceed to completion. It would be surprising if this is an amateur greenmail attempt against Rashnikov, especially as it will not be difficult to find Egorova in Siverskoye village if Rashnikov wants her found. If the greenmailers are professional, it’s unlikely they would pick Rashnikov’s region to go to court. They would assume Rashnikov can influence the judges in the region, so they would pick a jurisdiction as far from his reach as possible. The ease with which Egorova won her freeze order is not only unusual in arbitrazh court records; to have done so on Rashnikov’s turf suggests that he might have acquiesced.
Barry Ehrlich, Alfa Bank’s steel analyst, has argued from the beginning that the Flinders Mines deal was Rashnikov’s folly. Many argued the same .
According to Ehrlich today, “we believe the deal is unlikely to be canceled by the court. The claim does not look like a political attack on the company since it does not affect the company’s domestic assets, and we believe a small minority shareholder will not be able to prove in court that the deal is value-destructive.
When the deal was first announced in November 2011, we argued that it was NEGATIVE for the company’s shares since any large-scale acquisitions with long-term returns (production at Flinders is expected to commence no earlier than 2014) would likely to be taken negatively by investors in the current market environment.”
“The acquisition would raise the EV/EBITDA multiple as consolidated net debt following the transaction will increase by ~$0.6bn. Therefore, the potential cancelation of the transaction could be POSITIVE. However, it is unclear how the market would perceive a cancelation by a court order since it would explicitly mean that the court agrees that MMK discriminates against minorities’ interests. Moreover some market participants may have considered the transaction as positive.”
“MMK is one of the most leveraged companies among steelmakers, with YE11 net debt estimated at $4.1bn (without including a ~5% stake in Fortescue in the calculation) and a net debt/EBITDA ratio of 3.0x. The transaction would raise the ratio to 3.2x, we estimate.”
A confidential international bank source reports hearing that international lenders to MMK were unhappy to learn last week that MMK was negotiating with state-controlled Gazprombank for a new loan to finance the Flinders Mines acquisition. MMK refuses to discuss that loan. Gazprombank’s spokesman says: “Firstly, we don’t provide information about our clients, and secondly, even if we do, I don’t know anything about this topic”. He promised to forward the question of the MMK loan to his superiors, but they are not replying. There are reports attributed to MMK sources that MMK is applying for $700m from Gazprombank.
MMK was asked to identify its principal lenders, but refuses. A resume of loan announcements discloses that the international banks exposed to MMK include Societe Generale ($1.5 billion); Royal Bank of Scotland, Deutsche Bank and ING (€365m); Nordea ($80m); and Bank of Moscow ($100m). According to the bank source, there seems to be concern that by taking the loan from Gazprombank, MMK would breach its required debt to Ebitda ratio limit of 3.5.
Boris Krasnojenov, steel analyst at Renaissance Capital in Moscow, hints that there is less to Egorova than meets the eye, and more of Rashnikov. . “Taking into account legal precedent [sic] in the Russian business environment, we cannot conclude with certainty at this stage what is driving the minority claim against MMK. We were initially sceptical on the FMS deal, as we believe the acquisition may increase MMK’s significant debt burden further, exceeding 3.0x 1H12 net debt/EBITDA, by our estimates. Additionally, the rationale for MMK to buy an iron ore asset in Australia is not clear to us, as the company does not have significant experience developing large mining greenfield projects, while taxes in Australia, and the cost of production and mine construction in general, are rising.”
Then again this case may be no more than it seems — someone with a normal head on her shoulders and the determination to do something to Rashnikov that he has earned: oblige him to be accountable to his public shareholders. If so, Egorova’s isn’t the only profile in courage in this affair. There is Judge Bulavintseva’s, too.