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By John Helmer in Moscow

The war over Norilsk Nickel’s shares to trigger owners’ battle on Friday.

“Let the man who seeks revenge,” the old Chinese proverb warns, “remember to dig two graves.”

For months now, Russia’s most valuable mining asset, Norilsk Nickel, has been the object of a bitter personal war between the two men, who took the asset from the state a decade ago – Vladimir Potanin and Mikhail Prokhorov. Norilsk Nickel has a current market value of $52.2 billion; its share price on the Moscow exchange is currently $274. But the value is under pressure from the war, and on Friday this week in Moscow, they will stage a new battle. The occasion is an extraordinary general shareholders’ meeting, called to vote on the 11-month old plan to create a new company, Energopolyus. Prokhorov has said he will vote his 28% stake in the company to prevent the spinoff of non-core electricity assets into Energopolyus, which was agreed by Prokhorov and Potanin last February.

The fight over the division of the assets Potanin and Prokhorov have co-owned for more than a decade has turned vengeful — and Prokhorov has started digging graves. A banker close to him has told Mineweb Prokhorov isn’t so much opposed to the spinoff, as determined to throw a spoiler in the transaction, creating uncertainty and confusion for the bankers being asked to lend on either side of the split between Potanin and Prokhorov.

According to the latest proposal, the electricity assets are to be bundled into a holding called Energopolyus by next March. They comprise shareholdings in generating companies, transmission and power supply units, ranging from 1.6% to 65.15%; plus portfolio assets that include the all-Russia utility, United Energetic Systems (UES). Publicly listed and publicly valued for the most part, the total market capitalization of the 13 assets is about $21 billion. Bank estimates of the value of the Norilsk Nickel stake in this sum is $7.3 billion. This is also the market cap officially attributed to the proposed spinoff company by Norilsk Nickel. That makes Prokhorov’s shareholding in Energopolyus worth between $1.8 and $2 billion; the variation reflects the uncertainty of whether Prokhorov is selling 25% plus 1 share of Norilsk Nickel, or 28%.

Early this week, Potanin announced that, despite threats by Prokhorov to vote against the spinoff, when Norilsk Nickel shareholders meet to decide the issue, Potanin will vote in favour. “NorNickel’s road show,” he said, “underscored investor interest in the unbundling of utilities asset and upbeat market valuation of EnergoPolyus’s prospects. I believe that as a result of this situation Mikhail Prokhorov will not dare to cast a negative vote.”

Last month, Norilsk Nickel chief executive, Denis Morozov, explained to shareholders the rationale for the deal. “Non-core energy assets are not fully reflected in Norilsk’s market capitalization,” he said. “Both Norilsk and EnergoPolyus will derive benefits from the Spin-off. [There is] little rationale for keeping the two businesses together.”

Moscow analysts have told Mineweb the deal is doubly attractive: in the first place, they expect that after the spinoff, Norilsk Nickel’s share price will retreat by less than the value of the assets that have been transferred to Energopolyus, thus adding value to the mining company. In the second, Norilsk Nickel shareholders will gain upside capital gains and dividend value from the new utility company.

So why, if he will be richer, and can demand a higher premium for his stake from Potanin, has Prokhorov decided to vote against, according to statements announced by his Moscow holding, Onexim?

A banker close to him describes Prokhorov as “an emotional guy – volatile. He changes his mind.” The banker added: “We have no idea which way Prokhorov will vote on Friday [on the spinoff].”

Another source reports Prokhorov as bent on revenge against Potanin, whom he blames for the string of misfortunes and humiliations that started last January, when the French police arrested Prokhorov on holiday at Courchevel, in the French Alps, and held him in jail for several days. The source claims that, after that, Prokhorov tried to mobilize major figures in the Russian government to share in the spoils, if he could make a better deal for the sale of his stake in Norilsk Nickel than Potanin was offering. The vengeance campaign moved up a notch in power, and also sideways towards a figure Potanin hates, and Prokhorov thought might help – aluminium oligarch Oleg Deripaska.

Deripaska, whose aluminium smelters are powered from low-cost power units which Deripaska has organized into a corporate group of their own, En+, has agreed with Prokhorov that, if the latter blocks the Energopolyus spinoff, Deripaska will pay Prokhorov a premium. The implication is that Prokhorov has struck a better deal for his assets than has been disclosed, or offered, to minority shareholders of Norilsk Nickel.

Dmitry Razumov, chief executive of Onexim, and Prokhorov’s closest advisor, has said the potential combination of Rusal and Prokhorov’s stake in Norilsk Nickel “will provide superior value to both companies’ shareholders.” But did Razumov mean all shareholders, or just Deripaska and Prokhorov? Is there an intention to take value from publicly traded assets in a fashion that violates the responsibilities Deripaska and Prokhorov have towards the markets in the US, Germany, where the Norilsk Nickel AGR’s are traded, and towards the Russian market, where the common stock is listed and traded?

Basic Element, Deripaska’s holding, said it will not comment, claiming that Deripaska’s agreement with Prokhorov is being formally made through Rusal. Rusal refuses to respond to Mineweb’s questions.

London bankers advising the Rusal listing, before it was aborted several weeks ago, told Mineweb that they had insisted, as a condition of the banks’ agreement to manage the LSE listing, that Deripaska would sign undertakings on transparency and corporate governance to protect new shareholders buying into Rusal. JP Morgan has called this a non-interference agreement. The new charge from the Potanin camp is that Deripaska is now doing to Norilsk Nickel shareholders what he has sworn not to do to future Rusal shareholders. They also say that, if Prokhorov is to take a sizeable stake in Rusal, before listing – his would be the fourth largest stake in Rusal – his conduct at the expense of Norilsk Nickel shareholders should trigger an investigation by market regulators.

Suspicion of what is afoot has already triggered shareholder reaction; the market price of Norilsk Nickel has been dropping – down 11.5% in the past month. The Deripaska agreement, reported publicly but with terms that remain secret, is the shovel Prokhorov has been shaking at Potanin. But it could be digging Prokhorov’s proverbial grave – and Deripaska’s, too.

To date, bank sources in London and Moscow have told Mineweb, there is considerable uncertainty over how to value what Deripaska has offered. A banker close to Prokhorov said he isn’t sure. He believes the offer is a mix of shares in the still privately owned, unlisted Rusal, and cash. It has been publicly reported that the offer is for an 11% stake in Rusal, but the valuation of Rusal is secret. The bank source says he believes it to be between $35 and $40 billion. At best, that makes Prokhorov’s piece of Rusal worth about $4.4 billion. It also isn’t known for certain exactly what price Deripaska and Prokhorov have agreed to put on the latter’s holding in Norilsk Nickel. Most reckonings put the cash part of Deripaska’s offer at not less than $10 billion. It may be less, with the obligation on Prokhorov to keep the Energopolyus assets inside Norilsk Nickel. It may be more, with a bonus payable if the spinoff doesn’t happen.

A summary of the Deripaska-Prokhorov deal has been circulating in Moscow, and shown to Mineweb. Interros appears to believe its provenance; Basic Element and Onexim won’t own up. The document sets out that Prokhorov is proposing to sell to Deripaska 25% plus one share. The price Deripaska agrees to pay is 11% of the Rusal shareholding, which both men agree to value at $5.562 billion. The attributable valuation accepted by Prokhorov appears to be $50.6 billion. This is far in excess of market valuations of what Rusal is worth.

The cash in the deal for Prokhorov is reported as $4.438 billion on closing, plus $2.7 billion in cash payment Deripaska asks to be deferred. A premium or percentage is indicated for that sum, but no figure is given. In total, Prokhorov is agreeing to accept from Deripaska $7.138 billion in cash, plus a premium. The aggregate, including the Rusal stake, is $12.7 billion.

In addition, the deal document reports a further element of the purchase, consisting of 4% of shares in Norilsk Nickel, which Prokhorov holds through KM Invest. Deripaska and Prokhorov have agreed to value this 4% at $2.032 billion. The attributable valuation is $50.8 billion.

Altogether, Deripaska is buying, and Prokhorov is selling, at the stock and cash equivalent of $14.732 billion. Unmentioned, unconfirmed, undisclosed to the market is the discount on Norilsk Nickel and the premium on Rusal.

Prokhorov has made public that he wants Potanin to pay $15.7 billion for his shares – almost a billion more, or 6.6%. If this were true also for Deripaska, and if Prokhorov stuck to market valuations of Rusal, Deripaska would be obliged to stump up at least $11.3 billion in cash – a transaction which is currently circulating in the London market for a syndicate of bankers willing to lend in these conditions. If the terms of the unconfirmed deal turn out to be accurate, Deripaska will have to borrow less than $5 billion. Is Prokhorov willing to accept less from Deripaska, valuing Norilsk Nickel shares at a discount to the market price he isn’t disclosing to the market – and with the promise of a private premium?

A banker close to Prokhorov told Mineweb: “we don’t know what Deripaska is offering.”

Prokhorov told the Financial Times, in remarks reported on November 21, that he had agreed to sell to Potanin at $293.60 per share. This represented a 12.5% premium on the moving average of the price for the previous three months. At the time, Norilsk Nickel’s market cap was at the $58 billion mark. Prokhorov’s proposal represented a market cap of $63 billion; the offer, $15.7 billion.

The contrast with the valuation agreed between Deripaska and Prokhorov is stark — $12 billion less, or a discount of almost 20%. That deal valuation was also 12% below the market cap on the day Prokhorov made his offer to Potanin.

On the same day, Interros announced that it had made an offer to buy from Prokhorov. A website announcement did not disclose financial details. Instead, Interros chief executive Andrei Klishas said: “The offer provides for a fair market value deal and regulatory approvals to be obtained by both parties. It aims at implementing previously announced plans by Vladimir Potanin and Mikhail Prokhorov to divide up their holdings.”

No dates have been given for the offers. After Prokhorov publicized his proposal, Interros responded publicly: “This is not like buying an apple in a kiosk…We need to evaluate the stake and then get approval from the regulatory organs.”

But Prokhorov didn’t want to accept Potanin’s money, and the latter knew it. Prokhorov’s offer came with conditions designed to make it difficult for Potanin to close the deal. Prokhorov insisted that Potanin should have no more than 30 days in which to agree, and 45 days to come up with the cash. The first deadline is December 21; the second is January 5. Prokhorov is calculating that his shovel would bury Potanin’s offer by the difficulty of raising such a sum in the middle of a global credit crunch, and the Christmas holidays. Prokhorov’s revenge is timed to coincide with the anniversary of the Courchevel affair.

Interros announced publicly: “If one side does not want to sell a stake, they can think up all kinds of conditions that will make it impossible.”

If this is how the war between the two is being fought, the December 14 skirmish over Energopolyus is mystifying bankers on Prokhorov’s side. “If he votes against,” one told Mineweb, “he is intending to screw Potanin. If he votes for, he is confident that Potanin won’t raise the money to close.”

The deal document reports Deripaska and Prokhorov undecided on the fate of the spinoff. Deripaska’s purchase price includes the value of the spinoff, if it happens. There is also a proviso that if Prokhorov wants to back the spinoff and then hang on to his shareholding in Energopolyus, Deripaska will pay him $2 billion less. That money will be subtracted from the deferred payment the two have agreed on.

In the summer, the Financial Services Authority (FSA), the London regulator, was known to have informally prepared for an investigation of Deripaska and Rusal, in anticipation of the lodgement of the application to list. In September, when Rusal announced it was pulling its initial public offering, the Financial Times reported the possibility that Deripaska and his company were struggling “to bring its corporation governance and accounting up to the standards required by London fund managers”. At that point, a bank advisor to the IPO told Mineweb that the non-intervention agreement protecting shareholders had not been signed by Deripaska or his co-shareholder in Rusal, Victor Vekselberg.

Prokhorov wasn’t in anyone’s sights then. He now is.

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