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Millhouse CEO Evgeny Shvidler, right, made a public offer to Russias metal makers, urging them to consolidate around Roman Abramovich, left.
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Sep. 08, 2006
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An Iron Grip on the Metals Industry
// Roman Abramovich acquiring metallurgy assets
Roman Abramovich intends to form Russia's largest metals holding around Evraz Group by acquiring other Russian smelters, Abramovich's business partner, head of Millhouse Group Evgeny Shvidler announced. The noncompliance of owners of other metal works forced Millhouse to make its open warning. In the presidential administration, they say that the idea has received the approval of Russian President Vladimir Putin.
Millhouse director Shvidler announced the beginning of the establishment of a metals holding around Evraz Group at a closed briefing on Wednesday. He said that negotiations on consolidation are going on now with the owners of all metals plants in Russia. Severstal and Metalloinvest are the most prepared to negotiate with us, Shvidler said. Millhouse is considering various consolidation schemes. A source close to the group said that it has the funds to buy out the metals holdings. This summer, the group was ready to pay $30 billion for 100 percent of Arcelor, the source noted. But Shvidler emphasized that Millhouse would prefer a share exchange. We are prepared to provide financial support of Evraz, he said, if it is necessary for large purchases, but the shareholders would prefer to carryout consolidation through an exchange of assets. Millhouse is prepared to see its share in Evraz decrease in the course of the consolidation. We don't need control, we need growth in the cost of the assets, Shvidler said. Millhouse does not want to increase its share in Evraz. Its shareholders are also tied with the agreement not to sell stock to third-party buyers.

Shvidler said that the project around Evraz was carefully chosen. We were looking for a sector based on a tendency for growth, including through consolidation, and its presence in Russia, Shvidler said. It turned out that a deal like that could be made only in metallurgy. We negotiated with everyone, including Severstal, the Magnitogorsk combine and Novolipetsk Steel, but the only ones who were ready to sell half their packages were [Alexander] Abramov and [Alexander] Frolov [owners of 82.67 percent of the stock in Evraz Group]. Chukotka Governor Roman Abramovich reached an agreement with Abramov and Frolov for the purchase of a half share in Evraz Group for $3 billion this summer.

In the metals industry, Shvidler's announcement was greeted with surprise. It's some kind of PR, one high-placed industry source said. Another said, I don't see any sense in the simple merger of assets of companies with different development strategies. It is possible that that attitude within the industry is what motivated Shvidler to make his statements. A source close to Millhouse told Kommersant that the negotiations with shareholders in metals holdings are very complicated. None of them wants to lose control and his status as a key owner. A Kommersant source in the presidential administration confirmed that Shvidler was driven to make an open attack. The head of Millhouse had to show that he has support from the very top, the source said. Vladimir Putin supports the idea of consolidation and suggests that it's the only way Russian metallurgy can become competitive on the world market. Presidential aide Igor Shuvalov expressed a similar position recently.

Shuvalov stated on September 5 that he gives a positive assessment to the large transactions in the Russian metals industry, particularly the purchase of Evraz Group stock by Millhouse. I like that topic, Shuvalov said. I know Roman [Abramovich]. He is an ambitious person. When he got rid of his oil assets, he had to find an application for his capital in any case, in Russia too That is just the start of a long road. I can easily suggest that a series of some other kinds of actions will follow this.

Officially, the candidates for absorption by Millhouse are commenting cautiously. Co-owner of Metalloinvest and Gazmetall Alisher Usmanov told Kommersant that he was ready to negotiate under certain conditions. There should be a fair assessment of our assets and the assets of Evraz, Usmanov said. He added that, after the consolidation of Metalloivest and Gazmetall, there worth will be no less than $10-12 billion. We assess Evraz to be worth just as much, so we would like to count on 50 percent of the united company, Usmanov said. I think it would be correct to consolidate my assets first and then hold a public placement for the united company, he explained. He emphasized that the merger had not yet been decided on. At Severstal, which is also preparing for a public stock offering, and at Mechel, they declined to comment. At the Magnitogorsk combine, Kommersant was told that they were theoretically ready for negotiations, but had not received any concrete offers from Evraz. Representatives of Novolipetsk Steel owner Vladimir Lisin also said that he had not been in negotiations.

Industry analysts say that the consolidation s a good idea. They calculate that the merger of Evraz, Severstal and Metalloinvest would result in a company with capitalization of $30 billion. The larger the Russian company, the larger the share it can keep during the purchase of a large foreign asset, noted USB analyst Alexey Morozov. Peter Fish of the MEPS research company suggested that European companies many be the first object for acquisition abroad because of the relative closeness of the financial and production systems and American companies would be considered only after that. Shvidler said that the British-Dutch Corus Millhouse was not interested. Analysts point to the possibility that Evraz may try to buy the smelting division of ThyssenKrupp. But they are saying on the market that its owners do not want to sell it. US Steel, the main producer of sheet steel in the United States (18 million tons per year), may be ready to negotiate a merger, a source in an investment bank told Kommersant. But the largest metallurgist in the U.S., Nucor Steel, can be acquired only through a hostile takeover, the source noted as well.

A number of experts have confirmed that there is no national idea in Abramovich's actions. The deal for the merger of Evraz Group with Metalloinvest is being presented with that sauce for sale abroad, to Mittal Steel, for example, Stanislav Belkovsky, director of the Institute of National Strategy said. British sources told Kommersant that Abramovich met with Mittal Steel owner Lakshmi Mittal recently. Millhouse is not saying what profit margins it expects from the deals with the metallurgists. IFK Solid analyst Denis Borisov estimated that the maximum that it could count on would be 40-50 percent profitability per year. That is much less than the company earned on the resale of Sibneft, Borisov noted. By our estimates, the profitability of that deal was 7000 percent or 700 percent per year. But there are no more assets that earn as well as Sibneft.

The Largest Russian Metals Companies

Company Volume of steel production in 2005 (mill. tons) Change from 2004 (%) Volume of iron ore production in 2005 (mill. tons) Income in 2005 ($ bill.) Change from 2004 (%) EBITDA in 2005 ($ bill.) Change from 2004 (%)

Severstal 13.6 6.3 13.1 7.97 27.2 2.08 -3.2
Evraz Group 13.9 1.5 16.5 6.5 9.7 1.86 -7.8
Magnitogorsk Metallurgy Combine 11.4 0.9 10 5.38 11.4 1.5 -8.8
Novolipetsk Steel 8.5 -6.6 12.9 4.47 -1.5 2.28 -13.3
Metalloinvest + Gazmetall* 3.6 0.06 44.2 4.1 12.5 0.9 7.7
Mechel 5.9 -4.8 11.3 3.8 4.6 0.73 -52

*There is no consolidated account. Indicators were obtained by combining the corresponding indicators of the separately companies.
Source: Company statistics

Maria Cherkasova, Elena Kiseleva, Evgeny Khvostik

All the Article in Russian as of Sep. 08, 2006

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