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By John Helmer in Moscow

There wasn’t much that the two Steptoes could ever agree on in the near-50 year old English comedy series about the scrap business — except that they would have sold out, if anyone was buying.

There is nothing at all comical about the Rashnikov family. But now brother Victor has managed to arrange the sale of his and his brother Sergey’s scrap business, one of the largest in Russia. The buyer, you might say without joking, is in the family.

Magnitogorsk Metallurgical company (MMK), operator of Russia’s largest steelmill, has reported this week that it has “acquired 99.99% of ZAO Profit – the largest metal scrap collector and processor in Russia. The acquisition of the strategic raw material supplier will significantly strengthen MMK security in terms of raw materials supplies.” The deal is reported to have been agreed at a board of directors meeting two weeks ago, on May 20.

The company announcement discloses that Profit’s financial results from scrap trading will be consolidated in MMK’s international accounting standards reports from the second half of 2009. Profit is also reported as supplying 75% of the ferrous scrap volume of about 5 million tonnes per annum, required by MMK.

The announcement omits to disclose the seller, or the transaction price.

When MMK issued its London IPO prospectus in 2007, it was revealed then that Profit was owned by the family of Victor Rashnikov, the controlling shareholder and chief executive of MMK. Before the IPO, Rashnikov held 97.32% of MMK’s shares. Afterwards, and until now, he holds about 86%.

Profit was run by Victor’s brother, Sergey Rashnikov. The prospectus text also revealed that Profit had sold a total of $1.4 billion worth of scrap to the MMK mill in 2004-2006, while MMK was reported as having sold scrap for reprocessing by the company in the same period for $243 million. Transfer pricing risk was acknowledged in the general risks section of the prospectus, but no details of MMK’s scrap transactions were available in that publication.

Ahead of the IPO, MMK committed itself to the next five years, 2007-2012, of procurement from Profit of up to 32 million tonnes of metal. In 2008, MMK reportedly bought $1.9 billion worth of scrap from Profit, representing roughly 90% of the latter’s sales revenue.

Although a closed joint stock company (ZAO), Moscow industry reports suggest that it generated Rb60 billion ($2 billion) in revenues last year, with a profit of Rb1.1 billion ($37 million).

MMK has just changed press spokesmen. Yelena Azovtseva has been succeeded by Yevgeny Kovtunov. Neither was available to clarify the deal valuation as a related-party transaction; the ongoing terms of scrap supply to the mill; or the new position of Sergey Rashnikov. A Moscow newspaper cites two estimates of the sale value — $10 million and $15 million — although industry analysts believe the company’s scrap business may be worth much more, if not at present.

“We don’t expect material cash outflow as a result of this acquisition,” reported Boris Krasnojenov, steel analyst for Renaissance Capital. He also revealed that Profit has been taken over by MMK with an unusually high level of debt — $250 million. “However, this amount primarily includes short-term loans granted by MMK and used for financing working capital requirement”.

Sergey Rashnikov was asked whether he expects Profit to be loss-making for the foreseeable future, and whether he is cashing out of the scrap business. The spokesman for his office said he is on holiday.

Sergei Lobanov, Profit’s first deputy chief executive, said it is incorrect to suggest that Sergey Rashnikov is retiring. He declined to say more about the transaction other than to refer to MMK claims that the acquisition price will be “ïnsignificant for MMK’s financial indicators.” Lobanov said the bottom-line plan for Profit after the takeover is “to stay at zero”.

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