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By John Helmer, Moscow

This is the season for believing.

But less than a fortnight ago, one of the three wise men in the picture – left to right, Filaret Galchev, Alexander Nesis, Suleiman Kerimov – was saying aloud (privately) that the problems of satisfying stakeholders in the proposed Russian potash consolidation were so complicated, he couldn’t hazard a guess on how they would be resolved, except slowly – very slowly. This evening, even with his feet up and noone else listening in, he says he still doesn’t know how the announcement of the merger between Uralkali and Silvinit was finalized yesterday, or even whether it has been finalized.

Not a single report by the Russian business media or the Moscow investment banks and brokerages has been able to explain this either. As transparent businesses go, this isn’t. It is thus in the hands of the anti-trust regulators of the US and China, and the big commercial interests standing behind them, to have the last say on whether the loot-bearing camels move in the direction Kerimov is pointing. This puts the most silent man in Russian business — the only oligarch who has never said a word in public – on trial in Washington and Beijing.

“He is the main player, as everyone knows. He had the idea from the beginning. But who knows what will happen next.,” says a person familiar with exactly what the wise men are thinking, who has himself a sizeable financial stake in having the camels with their loot move in his direction. So what changed over the past few days to produce the announced terms of the merger agreement, creating a single Russian potash producer, and subsuming the Silvinit shareholders in Uralkali’s listed shareholding? “I don’t know what changed.”

On only one thing the source says he is sure. “Noone from the outside, noone external pushed. There was no role of the government.” For a deal in Russian resources valued at almost $24 billion to be executed without the preliminary nod or explicit say-so of the deputy prime minister Igor Sechin is unprecedented. Unbelievable – unless this is Christmas.

But Christmas comes every day to VTB Capital, the principal Russian investment bank, and Goldman Sachs, which advised Uralkali on the deal terms; and Bank of America-Merrill Lynch which advised Silvinit. They have done the arithmetic according to which, in its transaction announcement Uralkali explains that Silvinit will cease to exist, its ordinary shareholders receiving for each Silvinit share, 133.4 Uralkali shares; while the preferred Silvinit shareholders will receive just 51.8 Uralkali shares.This exchange ratio, claims Uralkali, “ensures that the proposed combination is in the interests of the shareholders of both companies.” VTB, it is also clear, loaned the money for the principal shareholders who have now agreed on the deal to buy into it and buy out those who had controlled Uralkali and Silvinit separately until this year.

In point of fact, it is obvious that only Kerimov and his associates, Zelimkhan Mutsoev and Anatoly Skurov, are satisfied with the deal terms so far. Whether the opposition of the other shareholders who think they have been stiffed will be potent enough to stop the deal remains to be seen. The deadline for the Silvinit shareholders to agree on the takeover terms is February 4, 2011.

Before then, if he hasn’t said or done anything to date to influence the terms of the consolidation, Sechin will be obliged to act. Prime Minister Vladimir Putin will also have to signal what he is thinking. President Dmitry Medvedev has already endorsed the consolidation of Russia’s milk and juice markets into just two foreign-owned giants, so he is bound to tag along with this one.

Technically and legally, the proposed combination of assets worth $23.9 billion at the current market capitalization involves sale and purchase transactions by foreign companies based in Cyprus. Even if they are beneficially owned by Russians, the offshore haven regiistrations should trigger the requirement for review and approval by the Government Commission for Control of Foreign Investment in the Russian Federation, aka the Control Commission. Putin is chairman; de facto secretary is Igor Artemyev, head of the Federal Antimonopoly Service (FAS). If Putin knows what he thinks of the deal, he would have told Artemyev to say something in public. Their silence so far means Kerimov’s deal isn’t done, yet.

According to Russian law, the merger must be supported by 75% of all shareholders of Silvinit, including both common and preferred shares, which will be treated equally for voting purposes. UBS reports “we believe this might be a potential obstacle to the deal. In particular, 50.9% of the company’s capital is owned by a group of investors headed by Mr. Kerimov.”

The two most important of the Silvinit shareholders are Zelimkhan Mutsoev (24%) and Anatoly Skurov (23%). Acting with Kerimov, they started buying out the original Silvinit shareholders several months ago. Although Silvinit denied they were a concert-party group, this was obvious. VTB loaned Mutsoev and Skurov the money for their buyout; VTB’s board chairman is Finance Minister Alexei Kudrin. He is the nervous type; he wouldn’t dare to let Kerimov, Mutsoev (both members of the Russian parliament, incidentally) and Skurov to have their way with VTB’s cash unless he checked with Sechin and Putin first.

Acron, which owns a 6.1% stake in Silvinit’s total share capital and whose controlling shareholder, Vyacheslav Kantor, used to have Putin’s backing for his own consolidation plans, has expressed its intention to vote against the deal. Kantor appears, however, to have lost the battle for upstream potash mining assets to be consolidated downstream, at the processing and mixing stage where he does his business.

In their presentation of the consolidation deal, Uralkali’s fib sheet claims there is a “unique asset fit” between Uralkali and Silvinit, which had “historically operated as one company until 1983.” Joining them up again, the presentation claims, would save $80 million a year in operating costs, plus $20 million in transportation. In terms of their combined production capacity of 10.6 million tonnes per annum, Uralkali and Silvinit would rank third in the potash world after Canada’s Potash Corporation, with 12.8 million tonnes, and Mosaic of the US with 11.2 million tonnes. For the North Americans, that means that Kerimov will control 15% of global potash output.

In two years’ time, it is estimated that the new Russian potash miner would rank number-2 worldwide in production capacity – 13 million tonnes compared to 14.3 million tonnes for Potash Corporation. If the output of the Belarus state potash miner Belaruskali is added – with Uralkali they already trade through the Belarussian Potash Company (BPC) — then more than 40% of the global potash trade would be in Kerimov’s hands.

UBS analyst Alexei Morozov reports to clients that the synergy and savings claims for the deal are worthless. “We do not believe that there are strong cost synergies from the merger, given that both companies are low cost producers with a relatively low sensitivity of their earnings to cost changes. We believe mining costs would be hard to change, some savings are possible in logistics and overheads.”

So this is how Kerimov intends the stakes in the new potash company to be carved up, at least for the year or so before he sells out to someone else, as he always does:

For the consolidation to go through, 56% of the Silvinit shareholders would have to vote in favour of the deal on February 4. Renaissance Capital, part-owned by Mikhail Prokhorov, encourages speculation that not everyone who isn’t an insider with Kerimov, Mutsoev and Skurov will be persuaded to go along with them – at least not now at the current offer price. “We think that some holders of SILVP [Silvinit preference shares] will vote against the deal because the implied discount of SILVP to SILV [Silvinit ordinary shares], at 61%, is significantly below the six-month average discount of 45%, and the implied price of $357/SILVP is below the price six months ago of $386 and below our target price of $554. Moreover, URKA [Uralkali] would not provide the same dividend yield as SILVP. Also, we expect that Acron (owns 8.1% of Silvinit common shares) will vote against the deal at the EGM, as it did at Silvinit’s board of directors meeting. Shareholders who vote against the deal or do not vote will be able to receive cash for their shares according to an independent appraisal of RUB203.37/URKA ($6.6/URKA), RUB27,133.5/SILV.”

According to Renaissance Capital, Nesis and Galchev, who have shared control of Uralkali with Kerimov since June “will approve the deal, since the valuation of SILV implies a discount to URKA, reflecting the lower liquidity of SILV and the fact that the announced conversion ratios are below the average six-month level.”

UBS says the same thing: “We note that the deal’s terms imply a 31% 2011E EV/EBITDA discount of Silvinit to Uralkali, which is not fundamentally justified, in our view. This discount is to a substantial extent driven by the lower liquidity of Silvinit, which is not fully applicable for M&A, in our view. However, apparently Uralkali was valuing Silvinit in line with the latter’s market valuation, resulting in such a high discount of Silvinit to Uralkali.”

Uncertainty about the final take-home price for Silvinit shareholders doesn’t mean that the Uralkali and Silvinit shareholders are in much doubt about the deal going through in Moscow. But privately they admit to greater concern for the reaction of the Chinese, who (with India and Brazil) dominate the purchasing of potash to fertilize their crops. “China may ask for special terms [to approve the merger]” acknowledges a source close to Uralkali.

Three years ago, the US Government had no reluctance allowing Oleg Deripaska’s Rusal to swallow its only domestic aluminium smelting competitor, even if the State Department wouldn’t allow Deripaska a visa to cross the border. Kerimov’s personal position may be similar, so far as the US Government’s visa authority is concerned. But down the passage at the US Department of Justice, where the anti-trust bureau is getting ready to take its holiday, it would be surprising if he had much trouble at all. Merry Christmas, Suleiman Abusaidovich.

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