Email This Post - Print This Post Print This Post

By John Helmer in Moscow

Polyus shareholders give Potanin big win over rival plan to transfer assets.

In Harold Pinter’s play, The Birthday Party, a group of seedy characters in a rundown boarding house, at a miserable English seaside town, arrange a birthday celebration for one of their number. But he denies it’s his birthday, and in the drunken uproar, he tries to strangle one of the women, and rape another. On the morning after, two other characters end the play bv telling the birthday boy that they are going to take him away. In sing-song alternation, they say: “We’ll watch over you. Advise you. Give you proper care and treatment. Let you use the club bar. Keep a table reserved. Help you kneel on kneeling days. Give you a free pass. Take you for constitutionals. Give you hot tips.” Some of Pinter’s interpreters believe this to symbolize the impact of the all-powerful state on the hapless individual.

Russian billionaires tend not to be hapless. But they do crave proper care and treatment, not to mention free passes and hot tips.

Mikhail Prokhorov is anything but hapless. Still, he is worried about the men who might arrive one day to take him, or his assets, away. Co-controlling shareholder in Polyus Gold, Russia’s leading goldminer, and in Norilsk Nickel, Russia’s dominant mining enterprise, Prokhorov has been trying to dissolve his partnership with Vladimir Potanin, and convert his stakes into as much cash as he can carry. His conflict with Potanin became public in January 2007; this has been inflicting a value discount on the share prices of the two companies for the past fifteen months. Polyus has suffered the most damage, and it is currently just 2.5% above its value a year ago; Norilsk Nickel is up 39% over the same period.

At current market pricing, and estimating that Prokhorov currently owns about 30% apiece of Polyus and Norilsk Nickel, he is worth at least $18 billion.

That’s a lot of cash to carry. Sources in Prokhorov’s Moscow-based asset holding, Onexim, say their current marching orders are to sell, and clear out. Prokhorov has told his two closest advisors, Dmitry Razumov and Sergei Polikarpov, that he intends to realize the maximum price his stakes can fetch, and invest all of the proceeds outside Russia. Public statements that Prokhorov has made about investing in Russian alternative energy sources, or domestic nano technologies, are not on the Onexim target list. His advisors are now competing with each other to scour the world for minority stakes in publicly listed, well- established companies that are going for upwards of $100 million. According to this strategy, Prokhorov intends to exit both Russia, and the mining business.

So far, however, the Prokhorov exit strategy has proved what the Russians call a tupik – a dead-end times two.

The cash-out agreement Prokhorov agreed last autumn with Oleg Deripaska, owner of United Company Rusal, obliged Prokhorov to accept a discount on his Norilsk Nickel stake of 12%; more, if the delay factor is counted. But Potanin’s fight-back tactics have substantially lifted the market value of Prokhorov’s shares. An argument with Deripaska and with Rusal’s banks over covenants restricting the terms of the Rusal-Norilsk Nickel acquisition, have suggested a way out, triggering a default call from Prokhorov and Onexim. The schedule of the deal closing – one of the contract terms now said to be in default – has been moved from March 31 to end-April, and further into May.

Mineweb has reported in detail on what the bankers’ covenants are, and how they impact disadvantageously on Prokhorov’s position. Moscow brokerages and a Moscow newspaper on Monday claim the bankers’ covenants that have caused the dispute between Deripaska and Prokhorov, represent a contract-breaking change in the terms the two men agreed last November.

What the argument over technicals comes down to, however, is that Prokhorov is no longer willing to give Deripaska the time to settle his debts for cash. Prokhorov is also concerned that the growing indebtedness Rusal is undertaking to pay for a hostile takeover of Norilsk Nickel could wind up reducing the value, even the saleability, of Rusal shares, when and if Deripaska can take the company to IPO.

Thus, Prokhorov is finding the position of playing creditor to Deripaska and Rusal to be as uncomfortable as Deripaska’s former partner, and sponsor in the aluminium business, Mikhail Chernoy (Michael Cherney). Chernoy has already gone to the High Court in London claiming that Deripaska defaulted on an earlier form of a similar deal, combining cash and shares, and a public listing that does not materialize. Chernoy’s suit is seeking more than the $4.438 billion Deripaska has just borrowed to buy out Prokhorov.

In a cash-and-clear-out strategy, Onexim is calling the contract-breaker; and claiming that Rusal owes the $300 million break-fee. Rusal has reacted by warning, through press and brokerage leaks, that it may sue for damages, and tie up Prokhorov’s options in litigation. But Rusal can hardly enter the High Court in London to claim recovery against Prokhorov, while Deripaska is telling the same court that it should have no jurisdiction over him or Rusal in Chernoy’s suit for them to honour their debts to him.

It is also improbable that Deripaska and Prokhorov would go to court in Moscow, as this would invite the one thing that both fear more than each other – intervention by the Kremlin.

This is no party game of Blind Man’s Bluff. Prokhorov’s best chance of cashing out now turns out to depend on his arch-rival, Potanin. Potanin’s willingness to pay him out has been tested today at the emergency general shareholders’ meeting called by Potanin’s Interros holding for Polyus. It will be tested tomorrow at a parallel EGM of Norilsk Nickel shareholders.

But the birthday party test was played even before the shareholders got to cast their votes. On March 31, Denis Morozov, the Chief Executive of Norilsk Nickel, celebrated his birthday party. In the past, Morozov has always invited Potanin and Prokhorov to attend, and they always have. This year, the insiders were speculating for days in advance on whether Prokhorov would come or stay away. Sources at both holdings concede that Potanin and Prokhorov have come to such a point of loathing each other, it has seemed unlikely they could bear to be in the same room, let alone negotiate an accommodation of their terms.

According to a source close to Morozov, neither Prokhorov nor Potanin came to his party.

Before the shareholder vote in Monday’s Polyus meeting, Prokhorov had agreed to defer to Potanin’s demand that he withdraw his proposal to have shareholders endorse the transfer of highly valuable exploration assets in the Polyus portfolio into a Prokhorov-controlled offshore company. Mineweb reported on this “carve-out” scheme at: http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=48197&sn=Detail

The Potanin forces have been mobilizing Polyus shareholders to vote this down as an unauthorized asset-stripping move. Interros also asked shareholders to vote changes in the company charter and more independence for the board, in order prevent such a cash-out by Prokhorov in future.

An announcement of Prokhorov’s backdown was issued by Yevgeny Ivanov, the Chief Executive of Polyus. He said that “Jenington International, which owns 6.6% of Polyus Gold’s shares, is not likely to take part at the EGM of April 7. This decision was adopted by me based on the necessity to serve interests of all the company’s shareholders. Amid corporate conflict between the two Polyus majority shareholders and lack of a unified position as regards the issues on the EGM agenda, we do not think it possible to take this or that side, which could happen if the management uses the right to vote provided to Jenington International.” A chart on the Polyus Gold website shows that Jenington is a wholly owned offshore (British Virgin Islands) subsidiary of the listed Polyus Gold, at the same time as it owns a 9% stake in the parent company, plus 100% of Polyus Investments (Cyprus) Ltd. Ivanov’s concession amounted to the acknowledgement that he and Prokhorov lack the power unilaterally to vote Jenington shares without the approval of the board and shareholders of the listed parent company. That is tantamount to conceding that they also lack the authority to divest assets.

The official results of the Polyus voting indicate that Prokhorov lined up with Potanin, and most other shareholders, to preserve the current board. But Prokhorov withheld his votes in favour of tightening the company charter and the accountability of the chief executive. The vote in favour of that Potanin initiative was 58% of the 72% of shareholders in the quorum. This fell short of the required 75% to pass.

Ivanov declared the outcome was good for both sides, without explaining why he was not in favour of improved corporate governance. “The vote,” he said, “is an important endorsement of the current Board of Polyus Gold and its strategy, and demonstrates the widespread support it enjoys from the shareholders. I am pleased that both major shareholders and institutional investors supported the current Board. I would like to underline that minority shareholders had played a very important part in taking today’s decisions”.

It is premature to say the party is over for Prokhorov. Nor is it in Potanin’s interest now to celebrate. Sources close to Interros told Mineweb are not happy that the charter improvements backed by most minority shareholders were blocked by Prokhorov. The risk to Polyus’s asset base, and to value for shareholders, remains, they believe. The fight to strengthen corporate governance and elect additional independent directors will intensify as the annual general meeting shareholders approaches in June. A source close to Interros told Mineweb that Prokhorov and Ivanov have been explicitly warned not to attempt to transfer assets into Polyus Exploration BVI before seeking a vote at the AGM.

The markets remain in two minds. Share trading immediately after the EGM indicated that the Moscow price fell 6%; while in London, the price gained 1%. This suggests the Russian perception that if he wants to play spoiler, Prokhorov can, and may still do so.

Leave a Reply