By John Helmer in Moscow
Novlipetsk Metallurgical Company (NLMK), the third ranked Russian steelmaker owned by Vladimir Lisin, is considering whether to cancel two recently announced US acquisitions — John Macneely Corporation (JMC) and Beta Steel. JMC was purchased for $3.54 billion in August; Beta Steel for $400 million in September. The deals are not complete, but closure had been expected before the year’s end.
NLMK spokesman Evgeniy Lukashevich claimed Friday that nothing was happening, telling CRU Steel News: “I have no update to our previous statement, when we announced that we expect to close the deal in 4Q2008.”
Two days earlier, on October 15, in a filing with the US federal district court in New York, the Carlyle group, seller of JMC, revealed that there was a disagreement over revising the price for the JMC transaction. Carlyle and its subsidiary, DBO Holdings, which owns JMC, asked the court to enforce completion of the transaction, or require NLMK to pay costs and damages. According to Moscow reports, which NLMK sources no longer deny, NLMK has asked Carlyle to lower the sale price to take account of the changed circumstances in the global steel market, the fall of steel prices, and a sharp rise in borrowing costs for the deal. NLMK’s bankers — Merrill Lynch, Societe Generale, and Deutsche Bank — have reportedly lifted the interest rate from an initially agreed LIBOR plus 45 points to LIBOR plus 145-320 points.
First word of the breakdown in the JMC deal appeared in a report last week by TroikaDialog Bank analyst Sergei Donskoy. After reviewing NLMK’s current financial position, he said: “The most interesting issue to us is whether Novolipetsk Steel will proceed with closing its recent US acquisitions, JMC and Beta Steel, which would cost it almost $4 bln. The company has already arranged financing – a $1.6 bln syndicated loan and a $2 bln bridge loan – but under the current c ircumstances, it could be wiser to walk away paying the break up f ee rather than overstretch the balance sheet in order to gain exposure to a shaky US market. Our recent conversations with the company suggest that this option is indeed being considered. ”
According to the TroikaDialog report, “should the deals be cancelled, Novolipetsk Steel would remain in a very comfortable spotin terms of liquidity and debt. On our numbers, the company’s cash position is currently around $1.3 bln (net of 1H08 interim dividends payable in 2H08), it has no long-term debt and its short-term debt stands at $1.6 bln, most of it from Russian banks.” Lack of current cash is not one of the reasons for reconsideration at NLMK, sources believe. Rather, there is growing concern that the uncertain steel market in North America and Russia next year, and the cost of money, potentially threaten the profitability model that supported the JMC and Beta Steel acquisitions when the model was being drawn up in the summer.
The apprehension now, according to bank sources, is that NLMK is buying out “huge plants on the verge of bankruptcy, with sizeable debts.” There is also a politically sensitive problem in Russia. Although NLMK is currently unstrained for liquidity, and is not applying for emergency loans from the Russian government, it may risk the Kremlin’s sympathy if Lisin is seen to be bailing out American steelmakers, while cutting back on production, jobs and investment in Russia.
The court filing by Carlyle and DBO claims: “In a series of meetings and telephone calls with the company, which occurred between Oct. 2 and Oct. 15, NLMK’s authorized representatives stated that changed financial market conditions warranted a reduction in the purchase price or a significant restructuring of the merger transaction. During these meetings, NLMK’s authorized representatives indicated that NLMK repudiated the merger agreement….Although effective Oct. 1, 2008, NLMK’s lenders entered into a binding agreement to provide the financing necessary to enable NLMK to consummate the merger transaction, and NLMK refused to take steps — steps entirely within its control — to draw upon that financing.”
According to the court claim, NLMK has tried to renegotiate the deal at “a lower purchase price than the one it is contractually committed to pay.”
Carlyle bought JMC in March 2006 for $568 million. The sale price it is now trying to enforce represents a 523% gain in two years.
Responding to the court claim by Carlyle, NLMK now claims: “There have been disagreements concerning the rights and obligations of the parties under the merger agreement, and at this time NLMK has not closed the transaction…NLMK has retained legal counsel in New York, and intends to defend vigorously against the claims.” NLMK’s Lukashevich refused to say what his company intends to do with Beta Steel.
NLMK’s share price before the start of Monday trading was just over $1, a 3-year low. Current market capitalization is $6.3 billion.