Evraz shuffle overshadows China takeover
By John Helmer
MOSCOW - A surprise board reshuffle announced last week by the Evraz group,
Russia's largest steelmaker and part-owned by billionaire Roman Abramovich, has
triggered a sharp negative market reaction.
It has fueled speculation that Prime Minister Vladimir Putin and the board of
the state bailout bank, Vnesheconombank (VEB), are unhappy with the way in
which Evraz has heavily leveraged its Russian mills in order to buy foreign
steelmaking assets, and are threatening more active state supervision of the
company's operations.
The change in Moscow casts a shadow over whether Evraz will be
able to complete its takeover of Chinese steel-products maker Delong Holdings,
a bid currently under review by China's Finance and Commerce ministries.
The Russian steel group already owns a 10.1% stake in Singapore-listed Delong,
which runs a 3 million tonne-capacity mill at Xingtai, Hebei province. If
Beijing grants its approval, Evraz has said it will acquire a further 32%. It
is also committed to acquiring 8.9% of Delong's shares from Citibank. Delong
has US$195 million of bond-based borrowings from the US bank, supported by 8.9%
of the steelmaker's shares.
If Evraz reaches the 51% threshold for Delong, it was earlier agreed that Evraz
would accept the trigger for a mandatory cash offer for 25%, or more, of the
remaining Delong shares; the initial offer price was S$3.90 (US$2.57) per
share. The acquisition plan indicated a valuation for 100% of Delong of
approximately S$1.2 billion to S$1.5 billion (or up to just short of US$1
billion). In the intervening months, the shares of both Evraz and Delong have
collapsed. Delong is at present priced at S$0.59 cents.
In the day following disclosure of the reshuffle, Evraz's share price was cut
8.3% to US$7.61 in Moscow trading, while other Russian steel majors remained
largely unchanged and the index as a whole dropped less than 3% on the day. The
reaction against Evraz came after the company had issued a statement that its
board had elected former controlling shareholder, Alexander Abramov, to be
chairman, replacing Alexander Frolov.
The board move is a fresh sign of Kremlin displeasure at the way the oligarchs
run Russia's steel business. Evraz is currently producing steel at about 60%
capacity at its Russian mills, having cut output and employment more sharply in
Russia than in its operations outside Russia.
Two of the Russian mills, Nizhny Tagil and Zapsib, were forced to admit last
month that they lacked the cash to pay their tax bills and have had to borrow
US$360 million to cover their obligations. This is in addition to the VEB loan
of US$1.8 billion, confirmed by the company on November 27. The first tranche
of US$201.3 million has already been drawn.
The December 10 company statement explained the board move, which will leave
Frolov as chief executive, as one of "ensur[ing] Evraz is best positioned to
deliver the company's strategic and operational goals. Alexander Abramov will
be responsible for leading the board and coordinating its activities."
The company also hints that there has been internal conflict between Abramov
and Frolov, his protege; the controlling shareholder, Roman Abramovich and his
Millhouse holding; and the newly installed Privat group from the Ukraine
representing Gennady Bogolubov and Igor Kolomoisky. According to the Evraz
release, the Abramov appointment "will ensure there is an effective dialogue
with all the company's stakeholders, which is of particular importance in the
challenging market environment."
In another guarded reference to the disconnect between Evraz's Russian
operations and its North American units - the Oregon Steel Mills group, and the
IPSCO pipe works - the company statement claims Frolov "will be responsible for
the daily management of the company's steel and mining divisions in and outside
Russia, as well as for realizing synergies of vertical and horizontal
integration between the company's businesses worldwide."
Anticipating the negative sentiment, the board is reported to "believe that
Messrs Abramov and Frolov have the extensive business experience and qualities
necessary to succeed in fulfilling Evraz's goals".
The immediate threat, which industry media are reporting, is that VEB may
insist on seating a representative on the board to safeguard the security of
its US$1.8 billion credit line. A Moscow investment banker close to the group
told Asia Times Online he had heard that Abramov has been facing bank margin
calls on loans secured by his Evraz shares, which have now lost 90% of their
value since the start of the year; 88.8% since September.
Another source told Asia Times Online that Abramov had lost personally when his
Diamond Age Capital Advisors, a Moscow-based hedge fund, collapsed recently.
Evraz does not release details of Abramov's and Frolov's stakes in the company.
Instead, the company has published figures showing that Cyprus-registered
Lanebrook owns 69.5% of the shares directly, with another 6.8% held indirectly.
Lanebrook's shareholding structure remains secret, but it is believed to
include Abramovich, Frolov and Abramov.
Industry reports in Moscow suggest that, as of seven months ago, Abramov's
stake in Evraz amounted to 24.29%; Frolov 12.15%; Privat 9.72%; and Abramovich
36.44%. That left a free-float of the London-listed stock at more than 17%. If
this is correct, Abramov's stake in Evraz has fallen in value from $11.7
billion in May to just $670 million at present.
Considerable mystery, and litigation, surround Abramov's actual shareholding in
Evraz, after he was retained by the group founders, Iskander Makhmudov and Oleg
Boiko, to consolidate its Russian steelmills, as well as the iron-ore and
coking coal suppliers they required. In time, Makhmudov and Boiko sold out, and
Abramov declared himself the controlling shareholder. However, he was
challenged in a number of cases in the courts of the United Kingdom,
Luxembourg, and the US. Some claims are still pending; some trustee
shareholding claims were settled confidentially with cash payments to the
claimants.
Before Abramovich's holding Millhouse acquired its 41.3% stake in Evraz in
2006, Abramov controlled 59.11%; Frolov 28.18%; and Valery Khoroshkovsky, a
Ukrainian protege of Abramov, 1.88%. Khoroshkovsky was placed in charge as
chief executive, until he was replaced by Frolov, and sold out. Abramovich
acquired 41.3% in mid-2006, but since then it has not been clear what was left
of Abramov's stake. Evraz and Abramov refuse to be precise.
Abramov is quoted in a Moscow newspaper as saying there will be no changes in
the board structure. This is treated with skepticism by bank and brokerage
analysts. VEB refuses to say what controls it is imposing on Evraz, and how
many seats on the board it may demand. Kremlin intervention to save Evraz's
North American assets from being lost to lenders may also come at a price of
"personal guarantees" from Abramovich and Abramov, an industry source suggests.
A Moscow banker told Asia Times Online that, whether or not Frolov has been
obliged to take the blame for the short-term debt crisis Evraz is facing, the
lobbying required to procure Putin's backing for the VEB loan is "beyond
Frolov's capacities. It is Abramov and Abramovich now, who are the key figures
in the company's survival."
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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