BREAKINGVIEWS-Norilsk war better than tentative peace dividends

Mon Dec 20, 2010 8:57am GMT

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-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Jason Bush

MOSCOW, Dec 20 (Reuters Breakingviews) - RUSAL (0486.HK), the Russian aluminum group controlled by oligarch Oleg Deripaska, has rejected a $12 billion offer from Norilsk (GMKN.MM) to buy its 25 percent stake in the nickel miner. That has dashed investors' hopes of a quick resolution to Norilsk's ongoing shareholder spat. But it's not such a bad thing.

Markets may be hoping for a resolution of the long-standing dispute. Yet there's no real evidence that the boardroom conflict is harming investors. Norilsk's stock price is up 45 percent in the last six months -- that's four times better than the Russian market. A slender 12 percent discount to international peers, on an enterprise value to 2011 EBITDA basis, doesn't look abnormal. So why treat the conflict as a disaster that must end at all costs?

Furthermore a proposal similar to the one made by Norilsk has downsides, which must be weighed against the potential peace dividends. For one thing, Norilsk would have bought RUSAL's stake at a 14 percent premium to its Moscow-listed shares -- 9 percent to its American Depositary Receipts. It still wasn't enough to make Deripaska budge.

Then there's the extra debt Norilsk would assume. It presently has around $3.5 billion in cash, so would need to borrow the remaining $8.5 billion, raising its net debt to EBITDA ratio from 0.1 to 1.5, according to Renaissance Capital. Although not excessive, such leverage would increase the group's vulnerability to fickle commodity prices.

What about the corporate governance implications? A buy-out of RUSAL's stake would dramatically boost the size of the shareholdings that Norilsk owns in itself, raising questions about how management would use these shares. Investors have already raised concerns about the use of such treasury shares, currently 8.5 percent of the total stock, to vote for management.

So instead of hoping for peace, western investors should learn to like the conflict. They're being wooed by all sides, and given unprecedented influence. Deripaska's criticisms of Norilsk may be self-interested, but they have concentrated everyone's minds on ways to improve the company's governance and business.

With him out of the picture, the pressure on Norilsk to reform might slacken. Investors should be careful what they wish for.

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CONTEXT NEWS

-- Russian metals miner Norilsk Nickel has made a formal buy-out offer to RUSAL, the Russian aluminium company, offering to acquire RUSAL's 25 percent stake in Norilsk for $12 billion.

-- In a statement, Norilsk said: "The analysis of institutional investors' and shareholders' opinions made by the Company demonstrated that they consider this course of events to be the most efficient at the moment." Norilsk set a deadline of 1500 on Dec. 28 for RUSAL to reply to the offer.

-- RUSAL responded quickly to the Norilsk offer by rejecting it. "For RUSAL an investment in Norilsk Nickel is a strategic one and we do not intend to sell our stake," it said. In October, RUSAL used similar language to rebuff a $9 billion offer made by the Interros Group of Vladimir Potanin, the other core shareholder in Norilsk with a 25 percent stake.

-- RUSAL is engaged in a public dispute with both Interros Group and Norilsk's management. It has called for management changes and launched legal action to overturn the outcome of Norilsk's annual general meeting, held on June 28, after losing one of its four representatives on Norilsk's board. RUSAL failed in an attempt to reverse the June vote at an Extraordinary General Meeting in October, despite its intense lobbying of western minority investors, who hold some 30 percent of Norilsk through American Depositary Receipts.

-- Norilsk statement: here

-- Reuters story: Norilsk offers to buy RUSAL stake for $12 bln [ID:nLDE6BF1E5]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [BUSH/]

(Editing by Pierre Briançon and David Evans)

((jason.bush@thomsonreuters.com)) Keywords: BREAKINGVIEWS NORILSK/