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By John Helmer in Moscow

Ukrainian steel company rejects Usmanov merger proposal on respective value grounds.

Alisher Usmanov’s Russian iron-ore group Gazmetall has failed to strike a deal to take over the Industrial Union of Donbass (IUD), a Ukrainian steelmaker, after the Ukrainians agreed to take Usmanov’s iron-ore for their furnaces, but refused to accept his shareholding terms.

Talks between the two were first reported almost exactly a year ago, in February 2007. Sources close to the abortive negotations claim

IUD had initially valued Usmanov’s assets in Gazmetall at roughly double IUD’s value, and allowing for a premium, the Ukrainians told Usmanov that a merger would cost him more than 50% of his Gazmetall holding.

Losing control of his assets wasn’t what Usmanov had in mind. In a clumsy attempt to sandbag the Ukrainians in a campaign of Moscow press leaks, Usmanov said publicly he valued his holding at $10-$12 billion, while he considered IUD to be worth $5 billion. He insisted that a swap of shares should leave IUD with less than a 50% stake in the new, merged company.

Subsequently, as “working group” talks on the deal continued through the year, Usmanov revalued Gazmetall up to $20 billion, and IUD at $9 billion. UBS’s Moscow brokerage reported Wednesday that “the disagreement between the parties underlines the rising valuations of mining vs steel companies, explained by the tightness in the market for steelmaking raw materials.”

But the Ukrainians were allergic to Usmanov from the start. IUD sources had told Mineweb when talks first became public, after Usmanov had leaked them in the Moscow press, that they were not at all keen on a merger, and that their interest to negotiate was limited to commercial agreements for iron-ore supply. Alexander Pilipenko, the vice-president of IUD, told Mineweb at the time “the issue [of merger] is not yet decided. Currently we have no committed agreements in either merger or raw supplies and it is too early to say that they will appear very soon.”

In his press leaks, Usmanov claimed the “merger” was a near-completed transaction, likening it to the merger of Mittal Steel and Arcelor, and that of Russian Aluminium, SUAL and Glencore. He claimed the merged entity “will be a great company comparable with the leaders of world metallurgy.”

IUD’s owners, Sergei Taruta and Vitaly Gayduk, refused to accept Usmanov’s offer of between 27% and 40% in the new company.

IUD comprises about 40 separate producers of steel and raw material products, including plate, pipes, and coke. Key assets include the Alchevsk and Dnepropetrovsk steelmills in Ukraine, and Poland’s Huta Czestochowa.

Usmanov’s iron-ore mines are two of the largest in Russia — Lebedinsky and Mikhailovsky. In 2007 total volume of iron-ore products from the group amounted to 33 million tonnes, equally divided between the domestic and export markets

Usmanov has made abortive consolidation bids in the Ukraine before. In October 2006, he was put off by Rinat Akhmetov, controlling shareholder of System Capital Management. Weeks earlier, executives at Vadim Novinsky’s Smart group told Mineweb they were not interested in an Usmanov-led consolidation of their assets.

In 2005, during the run up to the reprivatisation of Krivorozhstal, Usmanov said he and the Smart group had formed a bidding alliance. Later, he denied he was a bidder for the mill, which was eventually acquired by Mittal Steel.

In May of that year, Usmanov claimed he intended to unite iron-ore mines in Kazakhstan and the Ukraine with his Russian assets into a “Euroasian iron-ore alliance”. This was rejected by the Kazakhs, and drew fire from Igor Kolomoisky, whose Privat Group controls Yuzhny GOK.

Usmanov has made bids to consolidate Russian iron-ore assets, also unsuccessfully.

He has done much better in his portfolio investments. Last month, it was revealed that he had cashed in his stake in the Australian miner, Mt.Gibson Iron, for a profit of about $270 million. Mt. Gibson management announced, and Usmanov confirmed, that he had sold his 19.73% stake in the company. The stake was acquired in 2006 for about $76.5 million though an Usmanov investment vehicle, Gazmetall Holding Cyprus.

The end-January transaction is reported to have been worth $363 million. In the year to June 30, 2007, Mt. Gibson produced 3.5 million tonnes of iron ore. It has been surmised that Usmanov had discussed greater involvement and investment in Mt. Gibson, but decided against. An earlier portfolio investment in 2004-2005 by Usmanov’s Gallagher Holding in Corus was also liquidated at a substantial profit, after the Corus management refused to agree to giving Usmanov a board seat.

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