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By John Helmer in Moscow

Russian oligarchs are famously bad as bird-fanciers.

As corporate takeover tacticians, when times were good, they were reluctant to share their premiums in buy-sell transactions. Not for them, the proverbial wisdom that what is good for the goose is good for the gander. Taking the latter bird’s position, they preferred to believe that what might be bad for the goose should be especially advantageous for the gander.

In the short history of Russian business tactics, it has often turned out that way. But now that times have turned bad, and the oligarchs have burdened their public companies with debt they cannot repay, while putting their own assets out of reach, they prefer to believe that what is bad for the gander should be even worse for the goose.

This explains the curious contradictions in a carefully arranged public statement by one of Russia’s largest steelmakers on January 20, Alexander Abramov of Evraz. While begging the international stock markets and his bankers to treat him gently, promising a swift revival of profits, and rapid rise in asset equity value, he issued an aggressive ultimatum to Beijing and Singapore. Unless China’s DeLong and Best Decade Holdings agree to slash their asking price for their steelmill, Evraz will walk away from its year-old takeover offer.

Abramov, chief executive of Evraz, described in a Moscow newspaper statement today [January 20] that last year’s agreement by Evraz to take over DeLong Holdings is conditional on renegotiation of the asset price. Asked if Evraz will go ahead with the takeover, Abramov said: “Yes, but we will have to agree on a different price Why overpay? Do not expect irrational behavior from us. We have positive greed in that sense.”

In February of last year, Evraz announced it had signed a share-purchase agreement with Best Decade Holdings, which held 77.08% of Delong. At the time, the terms announced provided for Evraz to buy an initial 10% of Delong, with the option of 41% more, leaving Best Decade with just over 26%. Under the code on takeovers and mergers in Singapore, where DeLong is listed, Evraz agreed to make a mandatory cash offer for the remaining Delong shares. In March, Evraz followed with the announcement of a further share lock-up agreement with Best Decade. This covered the remaining DeLong stake Evraz had not already committed to buying. Best Decade agreed not to dispose of any of its remaining holding in Delong, except to Evraz, before 31 October 2009.

Delong runs a 3 million tonne-capacity mill at Xingtai, in Hebei province. At the end of September, the company disclosed that net profit had fallen 47% year-on-year to S$53.4m (US$36m) during the nine months to September 30, because of the financial crisis and weaker demand for steel products in China. Then in October, it shut down two blast furnaces. These were re-fired, and production resumed early this month.

Last year’s Evraz acquisition plan indicated a valuation for 100% of Delong of approximately S$1.2 to $1.5 billion. In the intervening months, both Evraz”s and Delong’s shares have collapsed. DeLong is currently at 65 Singapore cents, for a market capitalization of S$348 million (US$231 million). Evraz’s share price was US$6.40 at close of trading on January 19; market cap at US$2.4 billion.

In today’s Moscow statement, Abramov tried reassuring the Moscow market that Evraz believes it is past the low-point of the steel crash of late last year, and is now lifting capacity utilization and output. His performance came a day after Evraz’s share price had collapsed 17% in Moscow and London trading, having dropped by a significantly larger margin than any other Russian steelmaker since the start of the year.

Abramov’s rare public statement precluded unscripted questions, which Evraz’s company spokesman declines to elaborate on, or answer.

According to Abramov, “to our pleasant surprise, in January, demand began to revive. As a result, we augmented our [mill capacity] loading by 20%-30%, compared to December. We were not expecting this. January is usually a dead month, but then suddenly there was demand to buy shapes and steel wire. In Ukraine, we have restored production almost completely. The fall of the hryvnia has helped, since our Ukrainian businesses largely focused on export markets… I admit that in February everything can change again, and in general the situation with the demand will be volatile for a long time. But I don’t think we will get any worse than in November-December.”

Regarding Evraz’s IPSCO and Oregon Steel assets in North America — for which the Russian company borrowed to pay $4 billion in 2007 and 2008 — Abramov claimed: “we are very happy with our acquisitions. These assets earn money and give us options for maneuver.” He conceded that ” the profitability of our North American assets remain at a very modest level [notwithstanding that] we bought only those assets that are included in the top ten most profitable in the North American region. Now our capacities in the United States are loaded at 92%, but such production is never 100% loaded. In North America, we produce rails and pipes, products which are mainly sold on long-term contracts, .with a clear formula tying product prices to the price of scrap.”

The main driver for Evraz’s loss in Monday stock-market trading was the public announcement of a plan drafted by the Interros holding, owned by Vladimir Potanin, controlling shareholder of Norilsk Nickel. This proposes the creation of a new state metals and mining conglomerate, with Norilsk Nickel and Potanin at its heart. According to the public version of the plan he has released, Potanin would take an 11% stake in the new company.

He is also proposing to dispose of Abramov in traditional gander-for-goose fashion. The takeover of the control stakes in Evraz, currently held by Abramov and by Roman Abramovich, would produce a 9% stake in the new concern for them in the plan as drafted.

The terms of the takeover imply the swap of equity in the new company, in exchange for state bank payoffs of the debts accumulated by the Russian companies. Evraz leads the Russian steelmakers, and most other Russian companies, in its US dollar indebtedness. At present it owes more than $10 billion in US dollar-denominated loans. Only state-owned Gazprom and Rosneft have obligated themselves to repay more US dollars than that.

Valuation of the equity and debt contributions to Potanin’s proposed new company are a “nightmare”, one analyst says, not least because none of the participants has yet agreed with Potanin, nor with the Russian government official in charge, Deputy Prime Minister Igor Sechin. The publication of the scheme of consolidation has allowed Potanin to take the initiative, and for Sechin to meet those involved over this week, and next.

An estimate by UralSib Bank analysts of the underlying valuation used in Potanin’s calculations for Evraz suggests the Abramovich-Abramov stake of 76.3% of Evraz would be swapped for 9% of the the new concern at a value attributed to 100% of Evraz of $2.83 billion. That corresponds to the Evraz market capitalization of last Friday. However, Evraz was worth just $2.352 billion at the close of Monday’s trading. How the negative value of Evraz’s debt should be counted in the swap has not been disclosed by Potanin.

Asked what prospect he sees for a state takeover of Evraz, as part of a larger plan for bailing out the group’s debts, Abramov said: “The market will not pay a premium just for size. We need synergy. I thought about how it’s now possible to swap, but found no acceptable options.” But he did express his gratitude for the debt relief he has already received from the Kremlin.

“The crisis is there, but we will get through it,” he said. “Prices, of course, remain low. If in 2009 they will be at the level of 2007, our profit will be greatly reduced, but we were not even in losses in the fourth quarter of last year. I do not think that we will have a loss this year. The important turning-point is April 1, when the new contracts for iron-ore enter into force. I think that the discount on the price relative to 2008 should reach 15-20%.”

“Of course, we have another problem – a great debt. Thanks to VEB [state owned Vnesheconombank] for helping to refinance $ 1.8 billion in the most difficult time. But we see no reason to panic, and there are other loans.”

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