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By John Helmer, Moscow

Two US banks named in May by Phosagro as mandated arrangers of its initial public offering (IPO) walked away from the share sale attempt after finding little interest among international investors to buy the shares from Phosagro’s owner, Andrei Guriev. The Americans also had problems with verifying how Guriev came into possession of the property he is selling — what one American bank source today calls “the shadow of Yukos”.

On May 11, Phosagro announced this list of advising, arranging, and underwriting banks: Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley, Merrill Lynch, BMO-Nesbitt Burns, BNP Paribas, Renaissance Capital, VTB and Troika Dialog. The lineup was discussed here.

On June 27, the Phosagro prospectus lists these banks: Citi (US), Credit Suisse (Swiss), BMO (Canadian), Raiffeisen (Austrian), Renaissance Capital (Russian-Cypriot), and Troika Dialog (owned by Sberbank). VTB and four other banks are no longer on the list. Two of them are American – Morgan Stanley and Bank of America Merrill Lynch. Neither would respond to questions about the Phosagro listing. Read the prospectus here.

This morning Phosagro explained the change: “These banks were among those approved by the shareholders’ meeting as potential partners for the underwriting contract. Subsequently those banks on the extended list that joined the syndicate were chosen [for underwriting]. Accordingly, none of the named banks refused, they just didn’t work in our syndicate of banks from the very beginning.”

In April of last year, the Russian news agency Interfax called Phosagro “one of the least transparent companies in the Russian chemical sector.” The wire also reported Maxim Volkov, Phosagro’s chief executive, as saying the IPO would be “technically ready in three months”. Volkov named four banks as candidates, among others, for the mandate to be issued — Credit Suisse, Deutsche Bank, Troika Dialog, and VTB Capital.

It was also revealed at the time that, before it went public, Phosagro was trying to persuade Prime Minister Vladimir Putin and Deputy Prime Minister Igor Sechin to swap the state’s 20% shareholding in the Apatit phosphate mining company, the source of Phosagro’s feedstock, for a 26.67% shareholding in Phosagro. The idea made sense as a preliminary to the IPO, because if approved by Putin and Sechin, it would have removed the “shadow of Yukos”. For the 20% stake is what remains of the original privatization of Apatit and the subsequent annulment and retrieval of the asset, following the convictions and imprisonment of Mikhail Khodorkovsky and Platon Lebedev, owners of the group they titled Interindustry Scientific and Technical Progress (Menatep).

But Putin and Sechin refused. No reason for that is given in Phosagro’s prospectus. But if Guriev had been offering to swap 26.67% of his shares in Phosagro for 20% of Apatit, at what valuation was Guriev proposing the exchange, and thus what was the price he expected to add to the value of his remaining stake in the bigger, better Phosagro? If these men couldn’t agree on that one, it may have been decided, as Phosagro subsequently has said, that the IPO attempt was agreed as a way of fixing the share price, and thus the cost of Guriev’s exit and the state’s entry.

According to US sources, their doubts about how Guriev acquired his control of Phosagro from Menatep, and what the Kremlin intends for the future of both Apatit and Phosagro have been deterring. The “political complications” are big in this case, said one source, not least of all because as a senator in the Federation Council, Guriev is an elected public official. That confers immunity from prosecution in Russia, an advantage perhaps in light of what has happened to the Menatep shareholders.

But it carries a decided disadvantage under US law, in particular the Foreign Corrupt Practices Act (FCPA). The 1977 statute bans US individuals and securities firms “in furtherance of an offer or payment of anything of value to a foreign official, foreign political party, or candidate for political office, for the purpose of influencing any act of that foreign official in violation of the duty of that official, or to secure any improper advantage in order to obtain or retain business.”

According to today’s reports by Interfax and by Vedomosti, a Moscow newspaper, the IPO “finds more and more solid guarantees from the buyers of their shares”. What is meant is that Russians connected to Putin and Sechin are anchoring the share sale and purchase, and thereby taking control of Phosagro from Guriev.

International buyers for the 50% shareholding Guriev is selling have either rejected the offer; or they have been sidelined by a Kremlin decision. Sibur, the state-controlled petrochemical spinoff of Gazprom, is to be one of the new stakeholders, through its affiliate Sibur-Mineral Fertilizers (SMF). The second new stakeholder, according to the press claim, is Bank Rossiya. That well-known St. Petersburg institution does not identify its board of directors, management board, or control shareholders on its website, though they too are well-known and led by board chairman, Yury Kovalchuk. A statement to the newspaper from Rossiya coyly admits the intention to buy shares: “The decision of the bank’s participation in the IPO will depend on the declared range offering price.”

Last November, Sibur told Bloomberg it was aiming at consolidation of the fertilizer makers. According to spokesman Rashid Nureyev at the time: “There are different options” [and a merger with Phosagro] “is one of them.” This morning Nureyev had this to say: “Sibur is implementing a strategy of gradual withdrawal from the non-core fertilizer business. However, we don’t exclude options for Sibur to increase the total capitalization of this segment through temporary financial investments in the acquisition of shares in similar assets. We have good perception of the sector, and we have been familiar with Phosagro and the company management team. Given the particular growth potential of Phosagro’s share value, such a financial investment in our portfolio will increase the number of possible options for a most effective way to withdraw from the share capital of Sibur Mineral Fertilizers.”

It’s the last line which is telling. It is not Sibur, so much as Sibur-Mineral Fertilizers (SMF), which is the likely consolidator of Phosagro. But in the end, the new owners may opt to keep the Phosagro name, and drop SMF’s.

If international demand for Phosagro shares has turned out to be weak in the circumstances, then a preliminary agreement on pricing with Russian state friendlies looks to be the preferred method of saving the IPO from discrediting the asset. This was done in the case of the Rusal IPO in Hong Kong in January of 2010, when Vnesheconombank was the anchor, and also the guarantor to other anchor shareholders that they wouldn’t lose their shirts. This was also the method to save the IPO of the state-owned rail cargo mover, Transcontainer.

Phosagro replies, first with a denial that there has been any preliminary agreement with Sibur on share price or volume of shares to be sold, and secondly: “The merger of Sibur and Phosagro is currently not discussed or examined.” Again the choice of words is telling. If Guriev is selling to SMF, with Bank Rossiya to be the warehouse of an additional part of the stock until the deal is completed, the transaction chain is not a merger. It is a buyout, with the reverse of state-owned assets into a London listed company at a satisfying premium.

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