Deripaska gives way as Rusal IPO stalls By John Helmer
MOSCOW - Russian oligarch Oleg Deripaska, who had been hoping to get the
go-ahead this week for a US$2 billion share sale and listing in Hong Kong by
his debt-burdened United Co Rusal, has succeeded in securing a debt
restructuring with more than 70 international banks, but in the process appears
certainly to have conceded control of the company.
He must also wait at least until next week to hear if the Rusal listing can go
ahead, after the Hong Kong Exchange (HKEx) listing committee postponed to
December 7 a hearing due for this Wednesday. The exchange issued no public
explanation for its last-minute scheduling. Media reports claim the reason is
that the 28-member committee lacked the minimum required forum of five members
to sit on the Rusal review. Others said more time was
required to study details of the debt restructuring.
Meanwhile, a public statement by Deputy Prime Minister Alexei Kudrin, which he
then corrected a few hours later, confirms what Russia's rival oligarch groups,
including those seeking Rusal's bankruptcy, have believed for many weeks.
Deripaska, Rusal's controlling shareholder, has given up control of his shares
to Russian state officials in order to stave off his foreign and domestic
creditors.
It is also the decision of the state officials involved that, for their
interest, possibly the state's, but not necessarily to benefit Deripaska
himself, the company must be protected from a shareholding combination of
Chinese, Libyan and other foreign shareholders. In short, Rusal has been
nationalized in effect, if not in form.
This is not a last-minute expedient to make Rusal's initial public offering
(IPO) of shares in Hong Kong appear to be a genuine privatization transaction.
(On December 2, the state savings bank, Sberbank, one of the underwriters of
the proposed listing, signaled that non-government demand for Rusal shares is
so weak at this point, it may join VEB in buying shares. "We will probably take
part in the IPO," Reuters reported the Sberbank chairman German Gref, as saying
in an off-the-cuff remark to reporters in Moscow. "The company is stable, its
market capitalization will rise. It is interesting from an investor's point of
view... ")
The transfer of Deripaska's controlling stake is a new stage in the way in
which state officials run the aluminum concession, which in Deripaska's time
has gone to the point of bankruptcy at home and asset forfeit abroad.
Kudrin, who is also the finance minister and holds a seat on the board of
Vnesheconombank (VEB), was commenting on November 25 in advance of what was
expected to be the HKEx approval of Rusal's listing application; the review of
the application had been scheduled for November 26 by the HKEx listing
committee, after it had postponed consideration at its meeting the week before.
But the listing committee hasn't been reassured, first postponing its decision
for another week to December 3 and now to December 7. No listing review has
been so contentious in the HKEx's short history.
Kudrin was trying to explain what would happen to Rusal after the IPO, for
which VEB had already voted to buy at least 3% of the 10% of new shares to be
issued. That vote, on November, was led by VEB's chairman, Prime Minister
Vladimir Putin. According to Kudrin, "Deripaska will lose control after issuing
the 10%. But we'll get the controlling stake after buying 3%. VEB made this
decision and I voted for it as a supervisory board member."
Kudrin was clearly implying that the state would take control of the company
away from Deripaska at the board and shareholder level; at present, Deripaska
is the chief executive, with a controlling stake of 53%. The board chairman is
Victor Vekselberg, with an 18% stake (shared with Len Blavatnik). For foreign
investors to buy into Rusal's IPO, Kudrin appears to have meant that they could
count on a state guarantee of control of the company. The implication was that
Kudrin acknowledged that Deripaska was a risk he knew potential investors - and
possibly the HKEx - were having trouble accepting ahead of the IPO.
No one in Russia of high official rank has ever dropped a hint like that
before. Later the same day, Kudrin tried to clarify the meaning of what he had
revealed. "When I said Deripaska and VEB would jointly control more than 50%,"
the minister said, "I didn't mean that the government would control the company
together with Deripaska. There will be more than 50% in total, from a
mathematical point of view." Kudrin then claimed that the state bailout bank
will participate in running the company "within its 3%".
Because the VEB has already been doing this since it gave Rusal a $4.5 billion
loan in November 2008, Kudrin can't have been acknowledging the obvious. What
has already been widely reported about the VEB transaction of a year ago - the
single-largest bailout by the Kremlin of any Russian company or oligarch - is
that it is secured by a 25% stake in Norilsk Nickel, which Rusal had borrowed
to acquire in early 2008; plus at least two of Rusal's domestic aluminum
smelters. In addition, the state auditor, the Accounting Chamber, plus other
government agents, conducted a review of Rusal's operating accounts during
December 2008 and January 2009, reporting to the government and the VEB on what
they had found, and what control measures they recommended. That report,
according to the chamber, is a state secret.
So what was new in what Kudrin tried saying twice over? In almost all major
bailouts by governments around the world, it is the accepted practice that the
chief executive or controlling stakeholder cedes operating control of his
insolvent enterprise, in return for the rescue and the investment of public
money. Deripaska has almost acknowledged this himself. He told a Bloomberg
interviewer, as part of a promotion of the Hong Kong share sale early this
month: "I am not working for money. I have my interests and I try to realize
what I can do, and for now I am focused on Rusal because it is very important
for Russia."
Russian banking sources believe that what Deripaska meant, and what Kudrin also
meant to expose publicly, is that Deripaska has made an agreement with high
state officials to cede a large part of his control shareholding in return for
their protection against his ouster altogether. Informally, and also secretly,
this makes Deripaska a de facto trustee.
Seeking a bankruptcy procedure against an insolvent Rusal would do the same
thing de jure, according to Russian law and accepted bankruptcy administration
practice. But, it seems, high state officials have already decided that that
won't be necessary in Deripaska's case. He, it seems, is offering a cash-out
and buyback option to the state, much like those he has already signed over to
former business associate, Michael Cherney, Vekselberg, and the other major
shareholder, Mikhail Prokohorov.
Kudrin was letting this cat out of the bag.
Regarding Deripaska's qualifications to continue running the company, the
Russian government has long been split into two factions. President Dmitry
Medvedev, his economic advisor, Arkady Dvorkovich, and to a lesser extent,
First Deputy Prime Minister Igor Shuvalov, have been in favor of trusting
Deripaska to get on with the job. They proved unable, however, to formalize
Deripaska's proposal for the state to acquire preferential, non-voting shares
in Rusal in return for more cash to cover his liabilities. Had they succeeded,
they would have taken over the aluminum concession, and its benefits, according
to the informal Russian code of governance, from political rivals, Putin and
Deputy Prime Minister Igor Sechin.
In 2006, Putin and Sechin were clearly in command of the state aluminum
concession. They favored Deripaska to absorb Vekselberg's SUAL aluminum
company, and told the latter he would not be allowed to go to the London Stock
Exchange (LSE) to list SUAL independently. That gave Deripaska the Russian
aluminum monopoly. But a year later, in 2007, Deripaska's perceived risk
prevented the LSE listing that was attempted. This risk, as the underwriting
and advising banks explained it at the time, comprised two parts.
The first was that Deripaska was a trustee for others, and didn't lawfully or
in practice own all the shares he claimed to own. This was, and still is, being
tested in the UK High Court, where the banks have reason to fear the court will
rule in favor of Michael Cherney's (Mikhail Chernoy) claim to a 13%
shareholding in Rusal, held by Deripaska on trust for Cherney since 2001. The
second of the said Deripaska risks was that his business practices exposed
Rusal to being nationalized by the Kremlin. When the London IPO attempt was
abandoned on these grounds, Deripaska tried again in 2008 in Shanghai and Hong
Kong, but failed for lack of Chinese buying interest.
Now that he appears to be struggling once more in his IPO efforts, for the two
London reasons, plus a third - Rusal's indebtedness - the state concession
itself is threatened with asset breakup along the metal production chain;
massive loss of Russian employment; and long-term destruction of
creditworthiness. Arguably, Medvedev might have said to Sechin - "Look what
your boy has gotten us into?" Arguably, Sechin might have replied - "Mind your
own business." To which, arguably, Medvedev might have retorted - "If there's
no listing, you and I won't have an aluminum business to mind."
In this clash of people and interests, Kudrin represents the treasury interest.
No ideologue, Kudrin is the tightwad of the state who is disinclined to release
funds and add liabilities, unless they are fully secured. So what he was saying
on November 25, for the first time, was that if Putin and Sechin agree to a new
VEB bailout, at least 3% of the Rusal shareholding, that should be secured by
something that hasn't been touched before - Deripaska's personal assets, his
personal shareholding stake.
There aren't so many Rusal assets left with which to secure fresh loans, and
shares are non-secured stakes, whose valuation is disputable in the marketplace
and much lower as security for a new bank transaction.
And so, what Kudrin appeared to mean was that if the Hong Kong IPO goes ahead,
and the state, through VEB, is to be the anchor investor and largest share
buyer, Deripaska would have to give up his personal shareholding control, and
that he would be subject to state control from now on.
But other Russian banking sources already believe that Deripaska did this some
time ago, at least not later than the point at which the rival oligarch group,
Mikhail Fridman's Alfa Bank group, began an attack on the assets and filed for
court-ordered bankruptcy and transfer of operational control to someone new. In
this contest, Medvedev has publicly tried to defend Deripaska from Fridman.
Fridman has consequently been deterred; but not by Medvedev's intervention
alone.
The conclusion Russian sources draw is that Deripaska has arranged a protective
trusteeship with Sechin as well. Kudrin appears to have wanted this to be
understood publicly.
Until the point at which the HKEx delayed approval of the listing, Deripaska's
strategy in his IPO efforts was a desperation measure to deal with the risk to
his own shareholding of a state takeover. If, Deripaska appears to have
calculated, he could find a strategic investor or two abroad, then he could
recruit them to help preserve his personal control of the company, and thereby
pit them against the state shareholder trust at home.
The evidence is clear that Deripaska tried to draw in state-sponsored
shareholders from China, Malaysia, Singapore, Libya and indirectly, through the
Paris and New York banks, two other sources - the French and US governments.
The one company valuation that has leaked out of this process is $19 billion,
which, according to a source close to the offer, was indicated to the Libyans.
That means that Deripaska has been trying to persuade someone to give him a
fresh $1.9 billion, and allow a start to clearing Rusal's foreign bank debts;
with the promise of a steady increase in Rusal's equity value as the price of
aluminum goes up. One technical speculative problem is relevant here - during
November, commodity aluminum rose to more than $2,000 per tonne in the
international market; it is now headed downward again.
This is a big gain over the sub-$1,500 price at which it was trading at the
start of this year, but it is nowhere near the $3,000 peak before last year's
crash. If aluminum market experts don't believe there is sustainable demand to
keep aluminum at $1,900 to $2,000, and if lagging demand for the metal will add
substantially to the surplus of aluminum next year, then the only direction for
Rusal equity value next year is not up, but down.
Offering stakes of strategic Russian resource companies to the US is a
dangerous business, as former Yukos boss Mikhail Khodorkovsky, once Russia's
richest businessman, has had six years so far to ruminate on in a Siberian
prison. There is no direct evidence that Deripaska paid his two calls this year
to the US for the purpose of selling Rusal to the Americans, but there are
indirect hints - the meetings he is reported to have had with New York
investment banks; and his statement, on a BBC television interview in the
summer, that he had been approached to betray Russia to the Americans, and had
resisted.
Last week, Kudrin desired it to be known that Deripaska had met a second test
of his patriotism. His resistance to the new terms of a Russian state purchase
of Rusal shares is at an end also.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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