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By John Helmer in Moscow

When T.S. Eliot was summing up what he knew of hollow men, he concluded: “this is the way the world ends/not with a bang but a whimper”. This is also the way Russia’s biggest-ever hostile takeover, Oleg Deripaska’s bid to take control of Norilsk Nickel, is ending.

The contract deadline for deal closing, according to insiders, is next Monday, March 31.

It won’t be clear until then whether it’s Deripaska, or Norilsk Nickel seller, Mikhail Prokhorov, who is doing more of the whimpering. If Deripaska fails to deliver on the terms of their agreement – an 11% shareholding in United Company Rusal, $4.438 billion in cash, and $2.7 billion in deferred cash – then Prokhorov will get to keep his 25% plus one share in Norilsk Nickel. Also, he will not be obligated to pay Deripaska the $300 million break-fee the two had agreed on, if Prokhorov developed cold feet.

Mineweb reported the transaction details last December: http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=41934&sn=Detail

Bank sources close to the proposed transaction now suggest that restrictive covenants Rusal’s bankers have attached to the financing have made the deal impossible for Deripaska to complete. These covenants relate, inter alia, to Deripaska’s personal equity in Rusal, his private company, which is the target of a contract violation suit and several billion dollars in compensation sought by Michael Cherney (Mikhail Chernoy) in the UK High Court. The Cherney agreement with Deripaska to be tested in the London court indicates a trust arrangement limiting what Deripaska can sell out of Rusal, or pledge as security for loans.

Reportedly also, the new covenants apply to the deferred cash payment in the deal; this is included in a summary of transaction terms provided by insiders to Mineweb last year. The sources claim these conditions cannot be met, and consequently, the financing cannot be drawn, and the sale-purchase transaction for 25% of Norilsk Nickel cannot go through.

There is no official confirmation from Rusal of the lending banks involved. However, both Merrill Lynch and Credit Suisse have confirmed their involvement. Credit Suisse told Dow Jones the financing agreement was signed on March 10, and drawdown was expected to follow shortly afterwards. But it didn’t.

“We are pleased to note the successful completion of the senior syndication for this deal, and we expect drawdown to be executed this week,” Adrian Walker, a director at Credit Suisse, was quoted as saying by Dow Jones. The other banks in the senior syndicate listed by Credit are ABN Amro, BNP Paribas, Barclays Bank, Calyon, ING Bank, Natixis, UniCredit, Goldman Sachs, and Morgan Stanley.

Credit Suisse, Goldman Sachs and Morgan Stanley were bankers to the proposed initial public offering last year, when Rusal was hoping to list on the London Stock Exchange. A banker engaged in that transaction told Mineweb it failed in part because Deripaska could not satisfy covenants and regulatory disclosures required for a mainboard listing.

Rusal has not confirmed that drawdown has taken place since March 10. A Moscow banker told Mineweb: “everything appears to be in place – the contract of sale and purchase between Deripaska and Prokhorov; the financing in time; and the deadline. But the deal isn’t closing.”

Rusal refuses to answer Mineweb’s questions, but the company has been trumpeting its takeover ambition for Norilsk Nickel since Deripaska and Prokhorov announced their deal six months ago. This was the last word from Rusal on what was happening; it is dated January 31. “UC RUSAL, the world’s largest aluminium and alumina producer, today welcomed the decision by Russia’s Federal Antimonopoly Service (FAS) to grant clearance for UC RUSAL to acquire a 25% plus one share interest in MMC Norilsk Nickel from ONEXIM Group. Notification of the approval was announced by FAS on 31 January 2008. ‘ Today’s decision by the FAS is of great significance for our transaction. This development supports the creation of Russia’s first global diversified metals and mining corporation. Our ambitious diversification strategy will see the company join the ranks of the world’s top five metals and mining giants,’ said Alexander Bulygin, CEO, UC RUSAL. ‘We plan to complete the deal in the near future’. The agreement for UC RUSAL to purchase a 25% plus one share interest in MMC Norilsk Nickel from ONEXIM Group was signed in November 2007. The transaction is the first step by UC RUSAL to become Russia’s first global diversified metals and mining corporation.”
Moscow investment houses have been reporting that Deripaska’s problem with the Cherney claims isn’t the only deal-breaker he is now struggling with.

Falling valuation in the marketplace for Rusal has been detected by Lehman Brothers, and a report by Lehman analyst Vladimir Zhukov spells out the new arithmetic. “With financing secured, we see no more technical barriers left that would prevent this transaction from closing. However, we believe the $300m break-up fee agreed between Mr. Prokhorov and UC RUSAL as reported by the Russian press (Kommersant, 7 March) should not preclude Mr. Prokhorov from terminating this transaction should he receive a more attractive offer.”

According to Zhukov’s report, published on March 18, “we have also reduced our valuation of UC RUSAL equity to $35bn for the purpose of this analysis as we believe the only condition under which UC RUSAL will become part of a merger would be it is valued more reasonably (than the earlier assumed $45bn for equity).”

When Rusal first signaled that it was preparing an IPO in London almost a year ago, the value of the private company was reported to be $30 billion. However, this figure has steadily increased in media reports, despite the failure of the IPO listing itself.

In last November’s deal with Deripaska, Prokhorov accepted an even larger premium on Rusal’s value; he also accepted a heavy discount in the valuation of Norilsk Nickel. Accordng to the transaction documents already made public by Mineweb, the 11% Rusal shareholding was agreed to be worth $5.562 billion. The attributable valuation for Rusal accepted thereby by Prokhorov was $50.6 billion.

In addition, the deal document reports a further element of the purchase, consisting of 4% of shares in Norilsk Nickel, which Prokhorov holds through KM Invest. Deripaska and Prokhorov agreed to value this 4% at $2.032 billion. This means that, for the purpose of their transaction, the two agreed to value all of Norilsk Nickel at the time at $50.8 billion. This was 12.4% below the prevailing market value.

During last autumn’s manoeuvering, Prokhorov made public that, if co-owner of Norilsk Nickel Vladimir Potanin wanted to top Rusal, and avoid the sale to Deripaska, Prokhorov proposed a price of $15.7 billion for his stake; $293.60 per share. This represented a 12.5% premium on the moving average of the price for the previous three months. At the time, Norilsk Nickel’s market cap was at the $58 billion mark. Prokhorov’s proposal to Potanin represented a market cap of $63 billion.

The contrast with the valuation agreed between Deripaska and Prokhorov is stark — $12 billion less, or a discount of almost 20%. That deal valuation was also 12% below the market cap on the day Prokhorov made his offer to Potanin. For the record, today’s market values for Norilsk Nickel are a share price of $277, and market cap of $53 billion. The value is up 4% in the year to date.

The Lehman report argues that, if Norilsk Nickel expands with the proposed absorption of iron-ore producer Metalloinvest – now in due diligence by UBS, see Mineweb, February 20, 2008 – there would be a greater revaluation upwards for Norilsk Nickel than if the Rusal takeover took place. Accordingly, Prokhorov ought to be able to count that he can make substantially more money pulling out of his deal with Deripaska, and waiting for the completion of the Metalloinvest consolidation.

If Prokhorov hasn’t counted this on his fingers yet, Norilsk Nickel chief executive Denis Morozov rubbed the message in on Monday. In an interview with Kommersant of Moscow, he was critical of the Rusal attempt at takeover, and suggested there would be Norilsk Nickel resistance if it proceeded.

In a subtle hint at the unraveling of Deripaska’s capabilities, Morozov pointed out that it has been five months since Prokhorov and Deripaska signed their deal, and yet “ nothing has occurred. Rusal has still not become a shareholder of NorNickel. What alliance is there to speak of?” Even if Rusal buys the Prokhorov stake, Morozov went on, the takeover “plans are not so realistic today.” To take over Norilsk Nickel as had been broadcast, “is almost impossible”. Warning that Rusal was all talk, and no proposals, Morozov said this would not be allowed in well-regulated markets. “Similar statements create a situation of uncertainty and provoke excessive volatility of the prices of shares. Management of any public company will be against such initiatives owing to the duties before the company and its shareholders. And we are not an exception.”

There is an ominous silence from the two shareholder camps, Onexim of Prokhorov and Interros of Potanin. Both refuse to say what they know about the failure of Rusal to close its deal to date.

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