By John Helmer in Moscow
Rusal seeks four seats on the Norilsk Nickel board.
Capt. W.E. Johns, the favourite novelist of English schoolboys, wrote 104 books about Biggles – Flight Captain James Bigglesworth, a World War I air ace. The boys’ demand for his adventures was so great, Johns had to press him back into service against the Luftwaffe in World War II.
Johns and his Biggles series are publicly celebrated for many things, but not the most important. Through hundreds of dogfights in the air, and adventures on the ground, Johns illustrated a maxim he didn’t coin – wickedness has character, cleverness none. The German Erich von Stalhein is vicious, since he’s always after Biggles’ blood. But since he also always manages to fail, his vices never materialize beyond the leer on his lips. He doesn’t even get worse when he becomes a Nazi.
Biggles, on the other hand, is clever to the point of genius, but internally blank, externally unlovable. Not even an affair with a beautiful French woman, whom Biggles meets after landing lost (a true story about Capt Johns, it turns out), generates a scintilla of sympathy for the mechanics of successful cause and effect.
Russian metals men are more the Biggles than the von Stalhein type. But just as vice gets its deserts, cleverness usually meets its match.
Take Oleg Deripaska, for instance, Russia’s richest man. Deripaska’s problem in the UK High Court is by now well-known to Mineweb readers. There he faces about $6 billion in claims for a stake in his Basic Element holding; in United Company Rusal; and in asset sale profits and dividends since he signed an agreement with Michael Cherney (Mikhail Chernoy) in March 2001. As dogfights go, this one has produced more evidence about Deripaska’s tactics than has been publicly disclosed in a courtroom before. As Mineweb has also reported, a ruling of the Swiss Federal Tribunal, issued in January of this year, has cleared Cherney of much of the innuendo which the pro-Deripaska forces have been circulating about his past and their partnership.
A court ruling from the High Court is likely before the end of the summer. But in ten days’ time, on June 30, Deripaska faces the judgement of an influential segment of the London market – the institutional shareholders of Russia’s dominant mining company, Norilsk Nickel.
An estimated 57 institutions, 20 of them large, and 54,000 individuals hold stakes in NorNick. Together, their stakes add up to a free float of 76 million shares, or about 40%.With a current market cap of $52 billion, NorNick shares are currently trading at $272, a discount of 14% to this year’s peak of $316.50, struck on May 21. For the minority shareholders, about $21 billion in value is at stake when they vote.
For the first time in Russian corporate history, free floating shareholder votes, held mostly in London, can determine the outcome of a takeover tussle between four of the dominant Russian figures in mining and metals.
Deripaska holds a 25% shareholding in NorNick he bought from former co-owner Mikhail Prokhorov in May, after a protracted battle with former partner, and current controlling shareholder, Vladimir Potanin. Potanin’s stake is just short of 30%. From the start of the Deripaska transaction with Prokhorov last autumn, Rusal has made public its desire to acquire more shares, and a merger with NorNick, with eventual management control.
Potanin is opposing, with the discreet backing of Prime Minister Vladimir Putin, and the explicit support of Alisher Usmanov and his Metalloinvest holding, which owns two steel mills and two iron-ore mines. Metalloinvest says it currently holds no NorNick shares; Usmanov’s Gallagher holding may have bought about 5%
Usmanov wants to dicker over price for his combining with Potanin, and the two of them can afford to take their time. Deripaska is in a hurry – and here is why.
When Rusal was initially formed in October 2006 by merger with Victor Vekselberg’s SUAL – the second Russian aluminium producer, then headed by Brian Gilbertson – and with the alumina holdings of Glencore, Deripaska (then with a 66% stake) signed explicit undertakings with his minority stakeholders (then with 22% and 12%, respectively). Either he listed Rusal on an international exchange on valuation terms they approved, or else Deripaska would be obliged to buy back their stakes for cash. The deadline set for this initial public offering by Rusal was set at three years from the merger agreement with SUAL and Glencore. That means the autumn of 2009 – just 15 months away from now.
A similar listing and buy-back option was signed by Deripaska with Prokhorov more recently. Investment bankers close to the transaction have told Mineweb they believe the deadline for Prokhorov is the same time next year as for the others. What this means is that a total of 43.2% — SUAL’s 18.9%, plus Prokhorov’s 14%, plus Glencore’s 10.3% — must either be listed on a European or US exchange (for value reasons Hong Kong won’t do); or else Deripaska (56.8%) faces a large redemption obligation.
The Rusal valuation the stakeholders can insist he accept is unlikely to be the low $30 billion target set in the abortive attempt at a London Stock Exchange (LSE) listing a year ago. It may be as high as the $51 billion valuation Deripaska persuaded Prokhorov to accept in their swap of NorNick for Rusal shares. At tops, then, Deripaska would have to come up with $22 billion in cash to pay his obligations; at minimum, about $13 billion.
London brokers and bankers say they believe the current market is so hungry for cash, it is now possible for Rusal to secure a listing there, if Deripaska tries again. However, the Cherney court case remains a sizeable hurdle for the due diligence, with a contingency set-off against Rusal’s value of about $6 billion. Deripaska could raise this money to settle with Cherney, if the latter were the chief obstacle standing between him, a successful London IPO, and a $22 billion payout next year.
Finding themselves in much the same position as Cherney in the latter’s 7-year old listing and buy-back agreement with Deripaska, it is natural for Vekselberg, Prokhorov and Glencore to understand Cherney’s case. According to Cherney’s High Court testimony, Deripaska was motivated to ask for the 2001 agreement, because Cherney was negotiating the sale of his stake in the aluminium assets to Vekselberg, allowing the latter the upper hand over Deripaska.
If and when the Cherney risk is disposed of, the London placement market might still demand a discount to Rusal’s ambitious valuation of between $40 billion and $50 billion. But the Rusal minorities would have Deripaska over a $22 billion barrel to secure their terms. For the market believes that Deripaska is unlikely to be able to raise that amount of cash for the redemptions falling due next year.
He must therefore look to his second listing option. Since the collapse of the LSE bid in 2007, this has been to enlarge the Rusal stake in Norilsk Nickel, and go for a full merger. That would have the effect of reversing the unlisted Rusal into the listed NorNick, beating the redemption deadline. The problem with this second option is that Potanin’s resistance has been effective so far. Whether or not the Kremlin has signalled to Deripaska that 25% of NorNick is as far as he will be permitted to go, the market appears now to believe this is the case.
Deripaska has no reason to abandon the dogfight before he takes to the sky, however. If he is following the Biggles book of attack gambits, it can be anticipated that he will either fly at his target directly out of the sun; or else he will come up from behind.
His flying test takes place at the NorNick AGM on June 30. Three Rusal candidates are standing for the new NorNick board – Deripaska; Vekselberg; and Rusal chief executive Alexander Bulygin. In addition, Rusal has endorsed a fourth candidate as an independent – Tye Burt of Kinross.
The full slate of candidates for one of Russia’s most unpredictable election races is as follows: http://www.nornik.ru/_upload/editor_files/file1012.pdf 
Sources close to NorNick and Potanin’s Interros holding believe that Rusal’s stake in the company is enough to win at least two seats on the board. But if the AGM votes down Bulygin and also Burt, then that should be the ballot-box sign that Deripaska is locked into a minority position in NorNick, from which there will not be enough time for him to meet his listing obligation in a year.
For weeks now, the London shareholders have been visited by teams representing Rusal and Interros, and for the time being, they are keeping mum. This week, however, proxy voting advisory service RiskMetrics/ISS Governance Services issued an advisory on how to vote at the AGM.
According to a press release from NorNick, “with respect to Item 3 of the AGM’s agenda – the election of Directors, RiskMetrics/ISS recommended that shareholders cumulate all of their votes for Independent Directors Guy de Selliers and Heinz C. Schimmelbusch and not vote for any other candidate. Their analysis noted the “high importance” of electing independent directors to the Board and with respect to Messrs. De Selliers and Schimmelbusch stated that “because they are the most senior independent directors on the company’s board, we believe that their experience will prove highly valuable through the course of ongoing changes at the company and its board of directors….” De Selliers has been on the board since 2002; Schimmelbusch since 2003.
Norilsk Nickel says that its current board has recommended to shareholders that they follow the RiskMetrics/ISS recommendations in voting their shares on Item 3. If this is the way the AGM votes turn out, then the repercussions won’t be long in coming for Deripaska.
A report by MDM Bank analyst James Lewis warns that, because the free float shareholders may cast all their votes in favour of one candidate, or spread them among several, “the danger therefore exists that, should independent shareholders not co-ordinate their efforts, their votes could be spread among a large number of candidates, in effect diluting their voting power, which could result in major shareholders Potanin and RusAl receiving more seats on the board at the expense of independent candidates. Furthermore, one of the two main shareholders could receive more candidates than the other, and in such a case we believe that minority shareholders could find their rights unequally represented as one side could end up with greater control of future merger negotiations.”
Vladimir Zhukov, metals analyst for Lehman Brothers in Moscow, told Mineweb the board election calculus is tricky. “I don’t think that 2 or 3 seats [for Rusal] make a difference in terms of blocking power, as both provide this. However, where 3 [Rusal] seats may make a difference is in a situation, where Interros takes 4 seats; 2 seats are taken by independents; and where the independents acting together become swing voters. Potentially, they could side with Rusal.”
Rusal told the Moscow market on Tuesday that it has rejected an invitation from Norilsk to discuss its merger plan. According to Rusal, it will consider this issue only after the new board is elected on June 30.