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By John Helmer, Moscow

It is quite legal to play lowball, the variant of poker in which the lowest value of the cards you hold in your hand wins over higher values in the hands of the other players. It is less legal in the retail market if a sale is offered at a lower price, and after buyers appear to make their commitments, the price is raised. That’s also called bait-and-switch.

Alexei Mordashov’s reputation for lowballing in the international and Russian share markets wobbled today in Moscow, as bankers disclosed that he is applying for a loan of $5 billion to buy the Raspadskaya coking coal company. Because other Russian steelmakers think that’s much too much in a lowball game, the immediate loser is Mordashov’s reputation – and the share price of his principal asset, the steelmaker Severstal.

Russian industry media and a report from Uralsib Bank in Moscow today substantiate the speculation that Severstal has received preliminary Kremlin approval to buy the Raspadskaya company (RASP), Russia’s leading coking coal producer. CRU Steel News reported in March that the control shareholders, Evraz with 40% and Alexander Vagin and Gennady Kosovoy with 40%, were offering to sell out. At the time, the two Russian steelmakers with least coking coal supplies of their own, Novolipetsk Metallurgical Combine and Magnitogorsk, were baulking at an asking price above $6 billion.

Bloomberg reports the same deal and financing details from “two people with knowledge of the plans”. Other “people familiar with the matter” have reportedly said that Mechel, owned by Igor Zyuzin, has already offered $2 billion for Raspadksya, and been turned down.

Internationals, including Rio Tinto and BHP Billiton, have been reported in the Russian press to have shown potential buying interest if the Russian government were to agree to allow foreign companies to bid for the strategic asset. But that has always been unlikely, so there is consequently no international bidding to jack up Raspadskaya’s price. According to Bloomberg’s familiars, the risk is that Raspadskaya may be worth “significantly less” than its current market value of 132 billion rubles ($4.7 billion). So why is Mordashov contemplating borrowing more? Indeed, one-third more than the valuation!

According to Uralsib steel analyst Dmitry Smolin, who cited as his source “one loans banker hoping to be mandated on the transaction”: “Severstal is in talks with banks for a syndicated loan of $5bln. We believe that the large acquisition financing will be used to buy 80% stake in Raspadskaya. According to the source, the deal is unlikely to come to the market before September 2011, which is in line with recent Alexander Abramov’s (one of core shareholders of Evraz) statement that the sale of 80% stake in RASP could be completed in 3 months. Assuming that $5 bln will be spent on 80% stake in RASP, the deal price will be equivalent $8/RASP share (RUB225/share), which implies 35% upside to the current share price of RUB166/share.”

Disclosure in March that Raspadskaya was up for sale caused a 29% fall in the share price, with a decline in Raspadskaya’s market capitalization from $6.2 billion to $4.4 billion on May 18. Here’s the share price chart over the past six months:

Raspadskaya is the leading coking coal supplier in the country, and it is forecasting 8.5 million tonnes of raw coking coal output for this year. That is up almost 20% over last year’s level. The 2009 level, before a double methane blast destroyed mine-1 on May 9, 2010, was 13.6mt. The company’s output target rises to 12.8mt in 2012, 15mt in 2013, and 18.5mt in 2015. Until last year’s accident, which killed 90, Raspadskaya accounted for 17% of coking coal supplies to the domestic steelmills

Uralsib’s report on the buyout deal warned clients that if Severstal goes ahead, there could be negative impacts for both companies: “We reiterate our view, that potential sale of Raspadskaya to Severstal would be negative for RASP minorities, as 1) RASP management would leave the company 2) no buy-back offer for minorities from Severstal and 35% premium is unlikely to be realized (given Mordashov’s track record with minorities in other acquired subsidiaries) 3) RASP will turn into another Belon and could be fully consolidated by Severstal in 2-3 years time at low valuation.”

Uralsib has issued a recommendation that clients should sell Raspadksya shares, and buy Evraz shares instead “as the company is likely to sell its 40% stake at some premium to the market and may significantly deleverage [Evraz’s debts] after the sale.” The reaction in morning trading on the Moscow stock exchange is that Raspadskaya’s share price fell almost 2%.

At the same time, Severstal has fallen 3.7%; it is down about 10% over the past month. For Mordashov with 82.9% of the shares, the new day’s loss in his hand amounts to $830 million.

Smolin reports that if Mordashov goes ahead with the purchase at $5 billion, “the borrower is likely to appoint up to four banks as mandated lead arrangers for the facility. The tenor is expected to be five years but the pricing has not yet been agreed.”

A loan of $5 billion would be the biggest in the Russian metals market since the ill-fated May 2008, loan, when aluminium monopoly United Company Rusal borrowed $4.3 billion from BNP Paribas, Merrill Lynch, Credit Suisse and the Royal Bank of Scotland to finance part of the cost of its purchase of a 25% stake in Norilsk Nickel, Russia’s largest mining company. Five months later, Rusal was on the brink of insolvency and was rescued from defaulting on the loan by state bailout bank, VEB.

Severstal, which was also near-insolvent at the same time with $8.3 billion in debt, last borrowed internationally in November 2008 when it signed a $1.2 billion five-year bailout with BNP Paribas, Barclays Capital, BTMU, Citi, Commerzbank, Deutsche Bank, RBS and Societe Generale. Severstal currently says it owes $6 billion.

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