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By John Helmer in Moscow

It’s never been the custom of Russian hunters to speak of hitting two birds with one stone. Instead, the Russian expression is to kill two rabbits with one shot.

Lest anyone think that President Vladimir Putin is losing his grip, the Kremlin last evening revealed a move that firmly knocks two metal and mining oligarchs on the head. In a announcement after market closing, Norilsk Nickel, Russia’s largest mining company, revealed that it is to merge with the iron-ore and steelmaking assets of Alisher Usmanov. A proposal for the deal from Interros, the holding company of controlling shareholder Vladimir Potanin, calls for a vote at the next Norilsk Nickel board of directors’ session on February 29.

If implemented, the move creates a $75 billion capital hurdle too high for Oleg Deripaska, the aluminium oligarch, to attempt his merger on hostile terms with Norilsk Nickel.

It also takes Usmanov out of action — a man who began his career as bagman and debt collector for the clique who once controlled Gazprom, and with whom Gazprom’s current directorate, including presidential successor Dmitry Medvedev, have never felt comfortable.

Deripaska — nicknamed “zaitschik” (hare) by his patron, Mikhail Chernoy (Michael Cherney) — had been telling the Russian press and brokers early this week that he had secured his takeover deal against Potanin. Deripaska claimed that remarks by a mid-level official at the Federal Antimonopoly Service (FAS) yesterday signaled Kremlin approval for the takeover.

According to wire reports, Alexey Ulyanov, head of the industry department at FAS, had told a Moscow conference that the anti-trust regulator “isn’t against” a combination of United Company RusAl and Norilsk Nickel. Because FAS is is understood to be a Kremlin enforcer, rather more than it is an anti-trust regulator, Ulyanov’s remarks were interpreted by MDM Bank as victory for Deripaska over Potanin.

“RusAl has not even asked for permission to acquire additional Norilsk Nickel shares (on top of the 29% for which it has already received approval)”, MDM told its clients this morning. “Yet a government official addresses the media, publicly stating that the deal would be approved. This is essentially the first time since the merger rumors began circulating that the government has expressed a view – and that view is clearly that the Kremlin wants to see the two companies merging in order to create the large Russian metals champion in the same mold as the oil and the gas industries.”

The credibility of this interpretation lasted less than half the Moscow day. An FAS source told Mineweb that Ulyanov had been misunderstood. Asked a hypothetical question about the proposed Rusal attack on Norilsk Nicklel, what Ulyanov meant to say, the source emphasized, was that if there were to be a merger, it would have to be hedged with tough conditions. One of them, Ulyanov offered, would be the creation of a Moscow metals exchange, operating in parallel with the London Metals Exchange, with prices denominated in roubles. The unlikelihood of this was a hint of Ulyanov’s lack of conviction that Deripaska’s attempt to take control of Norilsk Nickel would be approved.

Mineweb has reported that, since Potanin met with Putin on February 5, there has been a visible change of atmosphere at Potanin’s headquarters at the Polyanka crossroads in central Moscow: http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=46908&sn=Detail

A source close to Norilsk Nickel and Potanin told Mineweb today the reason is now clear. Potanin has agreed with Usmanov to merge the latter’s metal assets into Norilsk Nickel. The Kremlin has also agreed that the combination is a signal to Deripaska that he will not be allowed to go for Potanin’s jugular.

The source added: “The strategy of enlargement or of merger of enterprises for the benefit of shareholders and the enterprise itself was always supported by Interros [the Potanin holding] as the lead shareholder of the company. We have said that a merger with Rusal was interesting. But the new variant is even more interesting.”

Another source close to the Kremlin said the decision has been made to stop Deripaska’s expansion. Publication this week by local Finans magazine of wealth estimates for Russian entrepreneurs helped reinforce the assessment that Deripaska has become altogether too rich, considering that his attributable wealth ia based on terms for the creation of United Company Rusal, which had been decided eighteen months ago by Putin. According to Finans, Deripaska’s personal value has risen to $40 billion — double last year’s estimate.

The minor player in the latest turn of events is Usmanov, whose holding companies Gazmetall and Metalloinvest control two iron-ore mines, Mikhailovsky and Lebedinsky, and two steelmills, Oskol and Nosta (also known as Urals Steel). To keep control of these assets, Usmanov has been trying mergers of his own. All have failed.

Usmanov has made abortive consolidation bids in the Ukraine, Kazakhstan, and in Russia. In October 2006, he was put off by Rinat Akhmetov, controlling shareholder of Ukrainian metals group, System Capital Management. Weeks earlier, executives at Vadim Novinsky’s Smart group, also Ukrainian, told Mineweb they were not interested in an Usmanov-led consolidation of their assets.

In May of that year, Usmanov claimed he intended to unite iron-ore mines in Kazakhstan and the Ukraine with his Russian assets into a “Euroasian iron-ore alliance”. This was rejected by the Kazakhs, and drew fire from Igor Kolomoisky, whose Privat Group controls Yuzhny GOK.
Usmanov has made bids to consolidate Russian iron-ore assets and steeelmills, also unsuccessfully. He is not responding to requests for comment or clarification of the new deal.
When Usmanov recently failed to strike a deal to take over the Industrial Union of Donbass, in the Ukraine, the negotiations put a value on Usmanov’s assets of $20 billion.

This compares with Norilsk Nickel’s current market capitalization of $55 billion.

Dmitry Smolin, equity analyst at UralSib Bank in Moscow, told Mineweb that, based on 9-month financial data for 2007, Usmanov’s two iron-ore mines and two steelmills would have an enterprise value of $20 billion only if an EV/Ebitda multiple of 7 were applied. That, Smolin argues, is too high, taking into account international iron-ore miners like Vale of Brazil. “We prefer to use a target EBITDA multiple of 6-7x for [the iron-ore] GOKs and 5-6x for steels (sum of the parts valuations).” A preliminary estimate for Usmanov’s assets in consolidation by Norilsk Nickel would be between $15.6 and $18.4 billion, according to Smolin.

Under Kremlin and Gazprom pressure, Usmanov may take the lower figure in exchange for 28% in Norilsk Nickel; possibly less. This bloc may be larger than the 25% plus 1 share, which Potanin’s ex-partner Mikhail Prokhorov recently sold to Deripaska’s Rusal.

At 28%, roughly half of Usmanov’s bloc could be compiled from shares Norilsk Nickel already holds itself, and intends to acquire in a buyback operation. What is unlikely to happen is that Usmanov’s new stake would match, let alone challenge, Potanin’s 29% stake in the company.

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