MOSCOW - As the fortunes of one of the world's largest miners of bauxite, and
producers of alumina and aluminum - United Company Rusal - take a savage
u-turn, and those of its controlling shareholder Oleg Deripaska with it, the
company announced last week that Deripaska had replaced Alexander Bulygin, his
veteran administrator and loyal friend, as chief executive.
Bulygin has been demoted into a non-executive role, supervising the board of
one of Deripaska's many sub-holdings, En+.
The company announcement cites Deripaska as saying: "Alexander Bulygin has
headed RUSAL for more than five years. Under his management the company, which
was the largest
Russian aluminum producer, became the leader of the world’s aluminum industry,
a truly global company with diversified and one of the most competitive
operations in the global metal and mining sector. I am confident that
Alexander's experience in consolidating assets and executing large deals will
be applied in full in his new role."
The announcement on the company's website said Deripaska "was already the CEO
[chief executive officer] of RUSAL for a three-year period after the company
was established in 2000. In the following years, he took an active part in the
company's development as a member of the Board of Directors. Now his role as
CEO will be focused on providing for the sustainable development of the company
under the conditions of the global financial crisis and implementing a series
of crisis management measures."
In point of fact, Bulygin was operationally in charge of the company from
before 2000, while Deripaska concentrated on asset consolidation by ousting
Mikhail Chernoy (also known as Michael Cherney), then a 20% owner of
Deripaska's stake in the company; preventing Chernoy from selling his stake to
rivals for control of the company - Victor Vekselberg, Roman Abramovich, and
Boris Berezovsky; and then raising the cash to buy out Abramovich's half-share
of Rusal before Abramovich did the same (or worse) to him.
For Deripaska to take operational control of Rusal away from Bulygin at this
stage may indicate that the two have started fighting between themselves or
that Deripaska is desperate to draw cash out of Rusal. There is also the
possibility that Bulygin has made independent contact with Chernoy and other
shareholders. A source who was previously close to them both inside Rusal says
Bulygin always tried to preserve an amicable relationship with Chernoy.
Deripaska claims that he has had no friendly business relations with Chernoy at
all.
A fight at the top of Rusal has occurred before, when Bulygin and Gulzhan
Moldazhanova clashed; the latter - whom Deripaska had trusted to supervise
Rusal's cash flow - was ousted according to sources at Bulygin's insistence,
and took a position at Deripaska's holding, Basic Element.
Less than a month ago, Deripaska also had a falling-out with Mikhail Prokhorov,
the former controlling shareholder of Norilsk Nickel. Last April, Prokhorov
agreed to become Deripaska's partner for a hostile takeover of Norilsk Nickel.
That scheme, designed to allow privately owned Rusal to secure a Moscow and
London listing by reversing into Norilsk Nickel, has been vetoed by the
Kremlin.
On December 26, after he failed in a vote to get elected to a new Norilsk
Nickel board, his candidacy not endorsed by Rusal, Prokhorov accused Deripaska
of violating the terms of their shareholding agreement. Deripaska has also
failed to pay at an agreed time a US$700 million payment he owed Prokhorov in
October - Prokhorov and his company Onexim have separately acknowledged that
Prokhorov has accepted a deferred payment scheme. Deripaska is also obliged to
pay at least $350 million to Prokhorov next month, plus $2.7 billion, the cash
remainder of the Norilsk Nickel acquisition of last year, in April, or
thereabouts. Prokhorov holds 14% of Rusal.
The other minority shareholders, to whom Deripaska has also given much the same
signed obligation he signed to Chernoy (international share listing or cash
buyout), are Victor Vekselberg and Len Blavatnik (with 18.9% of Rusal), and
Glencore (10.3%).
Chernoy was the first of Deripaska's stakeholders to charge him with violating
his obligations. That case is to go to trial in the UK High Court, if
Deripaska's appeal against the trial is rejected in mid-year.
The other shareholders are now negotiating with Russian government officials to
conserve the value of their stake, if Rusal itself becomes insolvent and seeks
a state bank bailout in return for cover for debts now estimated to have jumped
from $7.5 billion, disclosed by Rusal in London in mid-2007, to more than $14
billion now. Moscow investment bankers estimate that Rusal currently owes more
than $17 billion.
Deputy Prime Minister Victor Sechin is also considering several options that
would liquidate Deripaska's 56.8% stake in Rusal entirely and oblige him to
transfer his stake to a state-designated company. A Deripaska spokesman
admitted publicly less than a month ago that he was seeking to sell stakes in
"practically all" his companies, including Rusal.
Sechin holds considerable power over the terms of such a deal. According to a
Russian government tax report of 2004, Rusal has been paying one of the lowest
rates of tax of any major corporation in the country. This is based on
interpretation of the legality of tolling contracts, which Rusal uses. If the
government were to conclude these were violations of Russian transfer pricing
law, Rusal may face claims of several billion dollars.
Kremlin officials have also been curious to know what has happened to Rusal's
profits during the aluminum boom. Although Rusal issues no audited financial
reports, it is possible to calculate these from revenue figures issued by
Rusal; estimates of earnings before income tax, depreciation and amortization
(Debited) provided by Vladimir Titkov, an En+ board director; and the tax rate
disclosed by the government tax report of 2004. Deripaska appears to have drawn
at least $10 billion in proceeds out of Rusal since 2001.
Reports from Alfa Bank and UnicreditAton, two Moscow investment houses,
estimate that Rusal's debts now total between $17 billion and $18 billion.
"While Rusal is not a public company, and we do not have access to information
on its debt or finances," Alfa Bank analyst Barry Ehrlich reported recently,
"we speculate that its fair enterprise value [EV] may be near or even below the
current consolidated debt level of the company and its owner."
What has been one of the world's largest miners of bauxite and producers of
alumina and aluminum has collapsed faster and further than the London Metal
Exchange cash price of aluminum, which now stands at around $1,351 per tonne;
down almost 50% since October. Industry analysts believe the current cost of
production at Rusal's Russian smelters is certainly "not much less than the
current aluminum price", and possibly as high as $2,000 per tonne.
If Deripaska disagreed with Bulygin over what is to be done next, and Deripaska
ousted him for not seeing eye to eye, there is going to a problem for the
international banks to negotiate with Rusal. For Deripaska is barred from entry
to the US and according to sources does not have a visa for the UK, both
countries being international markets where Rusal's creditors are based.
Bulygin, on the other hand, as chairman of En+, nominal holder of Deripaska's
56.8% Rusal stake, holds requisite visas, but he appears to have lost
Deripaska's confidence.
According to Marat Gabitov, metals analyst of UnicreditAton in Moscow, Rusal is
at or close to loss-making for the production of aluminum, and its debts have
reduced EV to zero. This is the end-game for Deripaska. His only profitable way
out is to persuade his friends in government to let him sell to them on terms
that leave him with no debt; no obligations; equity in a new state
consolidation; and the right to keep the cash he has already accumulated.
The generosity of these terms is now up to Sechin. Gabitov reckons the
"government would be much more generous to Rusal's shareholders. If the
government takes the 25% stake in Norilsk for the whole of $7.5 billion in
Rusal's debt, it would be very positive for the company and its shareholders."
If this is the outcome Deripaska is playing for, he attempted last week in a
letter to President Dmitry Medvedev to divide government officials and pre-empt
his critics and opponents with a more favorable offer than the options Sechin
is already considering.
The letter, dated January 20, is confirmed by Kommersant newspaper, which
published excerpts on January 21. Rusal's spokesman Vera Kurochkina has not
challenged their authenticity, though she and the company refuse to comment on
its contents. According to Kommersant's version, Deripaska has asked the
Kremlin to accept a valuation for Rusal of more than $40 billion; to give the
company $6 billion in fresh loan funds; to leave Deripaska in full control; and
to accept, as security for the bailout, a special issue of preferred shares
with no right to vote, and no dividend payments, so long as Rusal earns no
profit.
Deripaska's offer attempts to raise Rusal's equity value by 50% over the target
which Rusal and its bankers sought in the London market, when they made their
pre-listing roadshow. Since then, the aluminum price has halved; and Rusal's
debts have multiplied by two-and-a-half. The bid to win over Medvedev with
these terms has been referred to Sechin for evaluation.
There may be barely a fortnight to wait to see what the Kremlin decides. That
was the time assigned to Sechin at a Kremlin meeting earlier this month to
review the debt and equity reorganization options for Rusal, Norilsk Nickel and
the private conglomeration of iron-ore mines and steel mills, controlled by
Alisher Usmanov, called Metalloinvest. Medvedev presided at the meeting on
January 13.
Another meeting with Sechin was called for January 20, when an even more
grandiose scheme of swapping Russian corporate debt for state equity was
reportedly to be tabled.
Spokesman for Deripaska, En+ and Rusal were asked ahead of publication to say
if Bulygin's removal from direct control over Rusal, and his replacement by
Deripaska, reflected a difference of viewpoint on how to resolve Rusal's
financial problems. They were also asked to estimate Rusal's current debt and
cash position, and the cost of aluminum production at Rusal's Russian smelters.
Sergei Rybak, Deripaska's spokesman at Basic Element, said these were questions
for Rusal, not for the holding company. Pyotr Litov at En+ acknowledged
receiving the questions, but said they were for Rusal to answer. At Rusal, Vera
Kurochkina declined to answer a telephone call, and insisted on the questions
being submitted by e-mail. She then did not respond.
All three also refused to confirm UK and US reports indicating that Deripaska
holds no current entry visa for the United States or the United Kingdom.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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