MOSCOW - Some people like to watch the sun
going down.
Alexei Mordashov of Severstal,
the third-ranked Russian steelmaker, and a 40-year
old man with enormous personal vanity, has been
persuaded by some desperate, but clever, fellows
in Luxembourg that, to watch his own sun going
down, and exiting Russia, Mordashov should pay a
ticket price of US$2.66 billion.
For the
time being, that costly blaze of light has blinded
the world's business media, and also Russian stock
brokerages, to what the Arcelor-Severstal merger
really means, at least in Russia.
For the
first time, a Russian metals oligarch has sold out
of his
business, following oil
oligarch Roman Abramovich on the well-trodden path
out the exit door, marked by the approaching
changeover in the Russian presidency.
Unlike Abramovich's sale last year of his
Sibneft oil enterprise to Gazprom, Russia's
largest enterprise, Mordashov's exit allowed,
apparently and for the first time, a foreign-owned
corporation to acquire majority control of a
strategic Russian metalmaking enterprise, plus its
iron ore and coal mines.
The only
comparable oligarch exit in favor of a foreign
company like this was the sale by Victor
Vekselberg, Mikhail Fridman and Len Blavatnik of
their Tyumen Oil Company (TNK) to British
Petroleum in February 2003.
That deal was
allowed by President Vladimir Putin, just before
the Americans launched their war against Iraq,
when the Kremlin had reason to fear a collapse in
oil prices might push the heavily indebted TNK,
other Russian oil producers, and the Russian
banking system, into bankruptcy.
When, a
few weeks later, Mikhail Khodorkovsky asked Putin
to allow his sale of up to 40% of the Yukos oil
company, Putin said no, twice. Everyone knows what
happened to Khodorkovsky for not listening.
Whether the Kremlin, which has designs on
one, possibly two other local steel magnates -
Alexander Abramov of the Evraz group and Igor
Zyuzin of the Mechel group - had been leaning on
Mordashov, or whether he rode off into the sunset
by choice, is still far from clear.
Asked
to say if Putin, who spent an hour meeting with
Mordashov on May 16, and the next week met with a
group of European Union officials, had heard of
the Arcelor buyout from either, or had approved of
the deal in advance, Putin's spokesman refused to
comment, telling Asia Times Online "we do not have
such information".
Still, no one in the
Russian steel business believes that Mordashov
would contemplate an exit, and the sale of
Severstal to foreign control, without Kremlin
approval.
According to one of Mordashov's
biggest Russian rivals, "the reasons [for
Mordashov's] meeting with Putin were obvious.
Severstal has a strategic meaning for the Russian
economy. Such decisions [are] never made without
approval."
There are reasons better left
unsaid why Kremlin officials do not advertise the
obvious. But even if the Kremlin approved of the
merger in secret, Putin is reserving the
opportunity to say no publicly, when the
government antitrust agency, the Federal
Anti-Monopoly Service (FAS), must review the terms
of the proposed deal, and issue a ruling either
approving, rejecting, or modifying it. The FAS
does what it is ordered to do by its superiors. It
was the agency which the Kremlin used to slow down
the sale of two aluminum rolling-mills by Oleg
Deripaska's Russian Aluminum (Rusal) to Alcoa of
the US. It was also the agency which scuttled an
attempt by Siemens of Germany to buy control of a
turbine builder and heavy engineering firm from
nickel oligarch Vladimir Potanin, proposing a
minority stake transfer instead.
There has
been speculation in the press that Putin doesn't
like Lakshmi Mittal, and refused to meet him last
year, after Mittal won control of the Ukrainian
steelmaker Krivorozhstal, and proposed talking
about his steelmaking ambitions there, in
Kazakhstan, and Russia as well.
If Putin
wanted to say no to that, refusing to meet was a
polite form of discouragement. For the episode to
trigger the idea that this month Putin encouraged
Mordashov to plot with Arcelor, and the
governments closest to it - France, Luxembourg,
and Belgium - to frustrate an Indian
government-supported takeover attempt of Arcelor
is unlikely.
For one thing, the Arcelor
deal with Mordashov, announced last Friday, had
already been rejected by another Russian
steelmaker, Vladimir Lisin - owner of the
Novolipetsk Metallurgical Combine (NLMK) - because
it violated the golden rulebook of Russian
steelmakers:
1. Russians never buy
minority stakes below the control, or at least
veto level.
2. Russians steelmakers never
spend more than $1 billion of their own, or their
company's cash, on an acquisition.
According to the terms announced by
Arcelor to date, subject to a Luxembourg
shareholders' meeting in a month's time, and
whatever Mittal may devise as a counter-bid
strategy, Arcelor and Severstal claim to have
agreed to a "merger".
Mordashov will
acquire 32% of Arcelor, while the Severstal units,
at least in Russia, will keep their Russian name.
Arcelor's existing shareholders will retain 68% of
the company. The combination of companies "will be
the number 1 steel company in the world with 46
billion euros [US$59.2 billion] in sales ... and
70 million tonnes of production". If the terms are
not implemented, Moredashov will earn a
deal-breaking fee of 140 million euros.
"I
do believe in this very much," Mordashov said
repeatedly during a press conference with Arcelor
executives on May 27. Was he trying to convince
himself?
Under the terms of the deal,
Mordashov would receive a position in Arcelor,
which according to share values and market
capitalization the day before Friday's deal should
have cost 7.3 billion euros.
The official
announcements indicate that, in exchange for this,
Mordashov is transferring his 89.6% shareholdings
in Severstal; these include the relatively
easy-to-value assets of Severstal North America -
the Rouge mill in Michigan, a planned auto steel
plant in Mississippi, and the Mountain State
Carbon venture with Wheeling-Pittsburgh to build
coke batteries. At last Thursday's market
valuation, Severstal was worth $6.5 billion, and
thus leaving aside the minority shareholders,
Mordashov's stake was worth $5.8 billion.
In addition, Mordashov is handing over the
Russian iron-ore and coal assets he has been
planning to sell back to his own company at an
elevated value, $4.3 billion; plus the personally
held stake of 42% of the Italian steelmaker
Lucchini, acquired a year ago, but not yet fully
transferred to the Severstal balance-sheet; this
is worth $239.4 million.
Altogether,
Mordashov's asset transfers to Luxembourg add up
to $10.34 billion. It is customary for foreign
buyers of Russian assets to apply what is known as
the Russian risk discount, which acknowledges the
possibility that the methods by which the assets
were acquired were illegal, and could be reversed
by the federal government in Moscow; or that the
cashflow accounting by which the management
enriched themselves and their shareholders might
have violated Russian tax and fraud laws, not to
mention the international money-laundering
statutes.
It is thus not surprising that
Mordashov's asset value exceeded by more than $1
billion the Arcelor value he received in exchange.
But the deal announcement also indicates
that Mordashov agreed to sweeten the pot by paying
1.25 billion euros in cash. Media reports suggest
that Mordashov will borrow to finance this part of
the transaction. The grand total proffered
therefore was $11.96 billion. The difference in
Arcelor's favor is $2.66 billion.
In its
announcement, Arcelor's board of directors said it
"believes that the merger with Severstal fully
recognizes the value inherent in Arcelor, and
offers Arcelor shareholders superior industrial
logic, greater value and the highest standards of
corporate governance compared to Mittal Steel's
offer. Therefore, we believe that this deal is in
the best interests of Arcelor's shareholders."
Mordashov's pricing allowed Arcelor to
claim that its share value was 44 euros, a steep
premium over Arcelor's closing price on January
26, the day before Mittal announced its takeover
offer. This price is also 6.26 euros ($8) over
Mittal's latest offer for Arcelor, announced on
May 16.
Mordashov has been announcing
publicly since 2004 that he wishes to be the
world's largest steelmaker, or at least the equal
of Mittal and Arcelor. The tycoon initially told a
steel industry conference that he anticipated "a
situation in the steel industry where within a few
years four to six companies each had a capacity of
about 100 million tonnes of steelmaking per year.
We would like to be among those companies."
But even with Rouge's and Lucchini's
output added, Severstal's aggregate output has
been unable to breach the 20-million ton mark.
Until now, to meet his ambitious target, Mordashov
had more than 84 million tons still to buy. The
task was too big for the ambition.
But to
sell out his assets to Arcelor was also
inconsistent with Mordashov's ambition. The
Luxembourg directorate therefore found the means
to make their Russian minority stakeholder feel
good. Mordashov, Arcelor announced, is to be
appointed the non-executive "president" of the
Arcelor board of directors, and have the right to
appoint six of 18 directors.
As the
current chairman of the board, Joseph Kinsch, will
retain his position, and chief executive Guy Dolle
as well, Arcelor appears to have created a
double-headed eagle to symbolize the change,
without an underlying shift in management control.
Russian oligarchs never spend a billion
dollars without acquiring control, unless they are
playing a portfolio share-game, and Mordashov has
signed a five-year lockout agreement to prevent
him doing that. The small print in the Arcelor
announcement reveals what little power Mordashov
has acquired at so high a price: "Arcelor's
executive management will remain in place,
supplemented by Severstal executives ... Mr
Mordashov has agreed to vote his shares in
accordance with the recommendations of the board
of directors."
The only explicit statement
of a Russian government official has so far come
from Alexei Kudrin, the finance minister. "I
basically consider," he said, "that Russia goes on
to the world markets, and we welcome cases when
business ... finds ... itself [in] favor with
foreign partners. This is a certificate of trust
to Russia as a whole."
In some countries,
finance ministers are powerful figures. Russia is
not one of them, and Kudrin conducts his portfolio
with the ever-present fear of being replaced, and
the anxious hope of being restored to the deputy
prime ministership which he lost last year. The
Finance Ministry and the Ministry of Economic
Development and Trade have long favored
Severstal's lobbying campaign to have the
government adopt steel trade arrangements with the
European Union and the US which benefit Severstal,
at the expense of other Russian steelmakers and
the rest of the Russian economy.
Kudrin
must have been forgetting a dossier that has been
accumulating dust on his heavily loaded desk. That
is the one which investigated Severstal's tax
avoidance practices. In a confidential report of
the federal Tax Ministry of September 2004,
delivered to the Prime Ministry but not acted on
at the time, it was noted that Severstal was
paying tax at between 12% and 14% of revenues, far
less tax than the norm among Russian oil
exporters, by employing a variety of transfer
pricing and tax optimization schemes.
Another study indicates that Severstal had
underpaid its 2003 tax bill by $40 million via tax
optimization schemes based in the Russian republic
of Kalmykia.
Such a small tax bill is not
the stuff of which the downfall of oligarchs is
made. Kudrin's forgetfulness is indicative of the
way he perceives the Kremlin flag is blowing, at
least towards Mordashov's enterprise. Had he been
asked whether the Kremlin intends - through monies
held in trust by Abramovich - to buy out Abramov's
control stake of Evraz, he might not have wished
to say anything at all. Kudrin is not a
decisionmaker of consequence.
Mordashov
has had commercial enemies in the past, and in
Russia such enemies often seek ministerial and
Kremlin support for their schemes. Mordashov's
biggest rival was the copper and coal oligarch,
Iskander Makhmudov. He helped finance a court
challenge to Mordashov's shareholding, but then
abandoned it. Makhmudov has steel sector
ambitions, but he has even fewer friends in
government than Mordashov.
And so the one
person on whom Mordashov's future in Russia
depended was Putin. Their meeting together at
Putin's summer residence in Sochi two weeks ago
provoked a great mystery. On the surface, it
appeared to be the longest conversation ever
conducted on large-diameter pipemaking by a
Russian president, and perhaps the longest ever
held by any head of state.
Severstal and
Mordashov's spokesman was almost silent about what
the hour-long conversation had covered, and why.
The verbatim transcript of Putin's and Mordashov's
remarks was released by the Kremlin to Kommersant,
a Moscow business paper, which reprinted the
details the following day.
Other
pipemakers told Asia Times Online they were
surprised by the arcane detail Putin mentioned,
and the fact that he addressed them to the newest
of Russia's pipemaking groups, whose
large-diameter pipemaking line at the Izhorsk
plant has been in trials since last autumn, and
will not commence commercial deliveries until next
month.
According to the Kremlin
transcript, Mordashov told Putin that "in the near
future", Severstal would launch its new Izhorsk
plant. "Now we are starting to make a pipe which
completely meets the requirements of Gazprom - 18
meters in length and 1420 mm in diameter. Putin
asked about Mordashov's competitors in Russia. 'We
in Russia have one more manufacturer,' he replied
- "Vyksa metalworks, but it does not have its own
manufacture of sheet [strip for pipemaking].'
Putin interrupted: 'But they too make 1420-pipe.'
Mordashov concurred - 'thank God, the energy
strategy of Russia is developing actively, and
deliveries [are growing] in this sphere, so demand
for this production [is also growing]."
Russian pipemakers told Asia Times Online
they had no idea why the largest pipemaking group
in the country, TMK, was not mentioned by either
Mordashov or Putin. A source at Vyksa's owner,
UMC, said he could not explain the omission.
Alexander Deineko, who heads the Russian
Fund for Pipemaking Development, which includes
TMK, told Asia Times Online that Putin's focus
seemed to be on large-diameter pipe for underwater
transmission of gas. "The conversation was about
about the two plants which are capable of
producing underwater pipes - Vyksa and Izhorsk.
The thickness allows them to be used in underwater
sections [of pipelines]. These sections will be
constructed with DNV certification [a reference to
Det Norsk Veritas, a Norwegian firm which provides
certifications for pipes]; Vyksa is almost already
for certification, and Izhorsk will be DNV
certified in time."
TMK produces
spiral-seam pipes of large-diameters, but their
wall thicknesses are not great enough to meet the
certification requirements for the North European
gas pipeline project. DNV certificates require the
new pipe to be straight-seamed. A tender for the
underwater section of the project will be issued
at the end of this year, or early next year, a UMC
source said, after the required certifications are
obtained. Referring to Mordashov's mention of
strip supply, Deineko noted that "Severstal is now
producing ... 850,000 tons of strip. That is
available, as I calculate, to supply 450,000 tons
to Izhorsk and 450,000 tons to Vyksa, so we are
not short of raw material."
The Kremlin
transcript reports Mordashov as telling Putin: "We
hope for a great volume of orders [of the LD pipe]
from our country." "Including for the
North-European gas pipeline," Putin then asked.
"Undoubtedly, our first priority is deliveries for
the North European gas pipeline," Mordashov
replied, referring to the project in which Vyksa
and the UMC are already well advanced in supplying
Gazprom, the principal Russian project partner.
"And how do you build relations with
possible customers?" Putin asked. "We perfectly
well understand that this is fundamentally
important for us. First of all - Gazprom. We have
had a working group with Gazprom from the very
beginning of [plant] construction. Gazprom ... is
for us the most important and fundamental
customer."
He went on to tell the
president that the key issue for Severstal now was
"to provide [a] high quality of pipe in absolutely
new conditions. An underwater gas pipeline." Putin
asked Mordashov if he remembered where pipes were
sourced from for the Black Sea Bluestream project
supplying gas to Turkey. "I do not remember,"
Mordashov said. "Perhaps Japanese or German pipe
was used."
"It is necessary that your
quality should be better [than the imports],"
Putin said. "For us, it is fundamentally important
to make good steel. This is a big technological
call, but I think we shall meet it."
If
Putin and Mordashov had been secretly chatting
about the prospect of a Luxembourg-based European
steelmaker taking complete control of Severstal,
including its pipemaking division, this apparent
reference by Putin to beating European imports of
pipe looks, in retrospect, to be ludicrous
camouflage.
Putin then changed tack,
asking Mordashov for other details of the
Severstal group, including payroll numbers at both
the domestic steelmaking and the automobile
divisions, and at Severstal's plants abroad.
"How do you estimate the technological
level at your enterprises abroad?" Putin asked.
"With us, no worse [than others]. Everyone has
advantages. But as a whole, certainly, we are
better." Mordashov claimed that in buying out
bankrupt plants in Italy and the US, Russia was
"reviving" the industry.
"And how are
social questions solved at your enterprises?, the
president asked. "Except for us," he said, "nobody
can provide quality-of-life to our workers. This
is the situation as it has developed historically
in Russia." He told Putin that Severstal operated
a youth camp in Cherepovets for 2,500 children,
plus an ice hockey team.
Mordashov also
told Putin that "in Cherepovets 250 children every
year abandon their homes. Who will work at our
enterprises and who will live in our cities? It
for us even a personal problem." Putin responded
that "it is healthy, that you, in business,
understand this sort of thing".
Asked
whether Severstal management had been cutting jobs
at its plants, a spokesman for the Russian company
told Asia Times Online that the payroll at the
Cherepovets plant was 35,589 at the end of 2005,
down 183 jobs from 2004. At the Rouge plant in
Detroit, Severstal has cut 600 jobs since it took
over, 22% of the pre-sale workforce of 2,700.
In short, Mordashov tried to pull the wool
over Putin's eyes regarding the social welfare
policy he has been implementing, beyond youth
camps and hockey games. But can he have dared to
speak to the president about caring for young
runaways from Cherepovets, when Mordashov himself
was running away from Russia?
John
Helmer has been a Moscow-based correspondent
since 1989, specializing in the coverage of
Russian business.
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