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By John Helmer in Moscow

Potanin’s cash and shares deal puts Deripaska in the hole.

Just two things are remembered about King Canute, a Viking who invaded England in 1013. One is that he had a large hooked nose. The other is that he tried to command the sea tide not to roll into shore. The second has made Canute’s name synonymous with the folly of being on the losing side, when you don’t have to be.

In the fierce war for Norilsk Nickel, the most expensive fight over a Russian mining asset ever fought, it is becoming as clear as arithmetic, and the sea tide, what the outcome will be. A recent report in a Russian newspaper, claiming that a member of the Norilsk Nickel board, Ralph Tavakolian Morgan, believes the company cannot afford to buy back a bloc of its shares is therefore interpreted as either a misquote, or Morgan’s miscalculation.

The buy-back scheme is part of chief shareholder Vladimir Potanin’s defence against a hostile takeover by Rusal and its owner, Oleg Deripaska. He and Potanin’s disgruntled former partner Mikhail Prokhorov began their assault on the company, after Prokhorov sold 25% plus 1 share in Norilsk Nickel to Deripaska in December. Mineweb has reported on the reaction to that deal, and Potanin’s new arrangement with the Kremlin, after Potanin met President Vladimir Putin in Sochi on February 5:

http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=47758&sn=Detail

Potanin’s group still retains the loyalty of Norilsk Nickel’s chief executive, Denis Morozov; company insiders add that Morgan, a Yale and Oxford graduate, is positioning himself to be on the winning side, whichever shareholder ends up in control of his company.

Four months ago, before the outcome of Deripaska’s buy-out of Prokhorov’s stake was certain, the Norilsk Nickel board agreed to start generating a stock of company cash. Accordingly, on November 15, the company issued a formal notice of its intention to the market. “Open Joint Stock Company Mining and Metallurgical Company Norilsk Nickel (“Norilsk Nickel”) announces that it has set the price for sale by it (the “Offering”) of 7,498,950 ordinary registered shares (the “Shares”) at US$285 per Share / RUB 6,982.5 per Share. The Shares are held by Norilsk Nickel as treasury shares. The Offering remains subject to a further Board approval of Norilsk Nickel, which is expected to be given on Monday November 19, 2007.” Morgan Stanley, Deutsche Bank, and Troika Dialog handled the sale. The proceeds were almost $2.2 billion.

Norilsk Nickel’s share price has see-sawed since the November sell-off. It fell sharply to a low of $220 in early January; and it has been climbing since then to reach $300.

In early February, when Potanin understood he had the support required to fight off Deripaska, he needed Norilsk Nickel to mobilize shares and cash. The idea, confirmed by Potanin’s holding Interros, is to buy back a 10% stake (19 million shares), and hold the shares in an offshore vehicle, to help fund the acquisition by Norilsk Nickel of Alisher Usmanov’s iron-ore and steelmaking group, Metalloinvest (this is the name of the asset management company; Gazmetall is the name of the asset holding).

If the buy-back offer is to be around $330 per share, then Norilsk Nickel’s cost will be about $6.3 billion. This can be covered by the sale of Norilsk Nickel’s non-core stakes in electricity-generating companies; they are worth about $7.2 billion. Selling them doesn’t require the approval of Prokhorov’s and Deripaska’s 25% shareholding.

To take care of Usmanov is going to require more than that. Mineweb’s initial calculation of the value of the Metalloinvest assets was in the range of $15 to $19 billion. This was based on 2007 financial data.

Usmanov’s men have subsequently announced that they value their holding at not less than $22 billion. Industry experts, working on this year’s valuation of iron-ore reserves, suggest that Usmanov may demand a valuation of between $25 and $30 billion. But as Usmanov’s assets remain privately incorporated – his co-shareholders are Andrei Skoch, with 30%, and Vasily Anisimov with 20% — and there is Kremlin pressure on the group to comply, a haircut for Usmanov is inevitable. The likely number at which the Norilsk Nickel takeover of Metalloinvest will be consummated should be around $20 billion.

Norilsk Nickel’s current market capitalization is $56 billion. To be an effective defence against Deripaska, without allowing Usmanov to become a threat of his own, Potanin’s scheme will not offer Usmanov and his partners more than 15% to 20% of Norilsk Nickel shares. This ought to be valued at between $8 and $11 billion. Ten percent of those shares – those Norilsk Nickel intends to buy back — can be given up without reducing Potanin’s effective voting control. This has been increasing lately, and it is now at 33% to 36%; this includes Potanin’s base stake estimated at 25% to 28%, plus 8% held by KM-Invest. The latter stake, though legally shared in equal proportion with Prokhorov, is likely to be voted against Prokhorov and Deripaska, and entirely for Potanin. The legality of such a vote by the KM-Invest chairman Rafael Akopov is certain; the personal reason stems from a history of Akopov’s relationship with Prokhorov, which is well-known in the Moscow market.

Up to $11 billion in cash may have to be found for Usmanov’s pocket, along with Skoch and Anisimov. No-one doubts that Norilsk Nickel can manage this on purely commercial borrowing terms. With iron-ore – plus new coal reserves just acquired –the evolution of Norilsk Nickel into the “Russian Rio” is cheap, not expensive.

Even before the two independent directors on the Norilsk Nickel board and the 40% free-floating shareholders must show their hand at the scheduled shareholder meeting on April 8, the outcome of these manoeuvres should see Potanin commanding the votes of up to 36% of the shares; Deripaska and Prokhorov with between 25% and 28%; Usmanov, Skoch and Anisimov with a combined 15% to 20%. The latter three are bound by the terms of their cash and share transaction to vote for Potanin, thus giving him between 51% and 56% of total.

When it is clear, not only that Potanin wins and Deripaska-Prokhorov lose, but also that the Kremlin endorses this outcome, and no other, even the nervous Morgan will know that it is purposeless to take sides against the inevitable.

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