The economic news of the week was the announcement about a possible merger of the Industrial Union of Donbass [a.k.a. ISD owned and controlled by Sergey Taruta and Vitaliy Haiduk – A.B.] and the Russian metallurgical group Gazmetall, controlled by Alisher Usmanov.
ISD has metallurgical plants in Ukraine, Poland and Hungary. Usmanov and his partners run mining and smelting factories in Russia and a metallurgical plant in Moldova. ISD and Gazmetall would combine to make a big player on the market: their combined annual steel output would be about 15,000,000 mt (ISD accounting for 60%), iron ore extraction would total 40,000,000 mt (Gazmetall accounting for 100%) and have a tentative market value of USD 15 billion - 17 billion.
However, it is too early to talk about any merger. The parties are only just “testing the waters” rather than negotiating any form of alliance.
Usmanov is optimistic: he says he expects a merger in late 2007. According to him, in three months the parties will complete the asset evaluation procedure and start dividing their shares in the new company.
Alisher Usmanov is reputed to be a good negotiator and manager, but the prospects are not that bright after taking a closer look. Over the past couple of years, he has come up with several asset-merging proposals in Russia, Ukraine and Kazakhstan. All he has achieved so far is control over a metallurgical plant in Moldova and a partnership with Vadim Novinsky in a future project for completing the construction of an ore mining and dressing factory in Kryviy Rih (Dnipropetrovsk region, Ukraine).
Usmanov says that ISD has made “very logical, consistent, and feasible propositions that meet the business interests of both structures.” In exchange for control over the mega-holding, Usmanov offers Taruta the post of president in the new company, with a Gazmetall man heading the board of directors.
ISD needs iron ore and Gazmetall has plenty of it. Besides, the Lebedin and the Mikhailovsky ore mining and dressing factories are located near the Ukrainian border. However, neither Taruta nor Haiduk is ready to part with majority interest as their assets are valued twice lower than Usmanov’s (USD 5 billion vs. 10 billion - 12 billion). Usmanov suggests that the partner that holds a smaller stake might buy additional shares on a preferential basis. In practice, this means, “You’re welcome to pay an additional several billion dollars.” ISD is a rich company, but it doesn’t have this kind of money. Even if Taruta and Haiduk had it, they would rather invest it in modernizing their operational facilities that produce nine million metric tons of steel. That would be a lot better than holding a minority stake in a bigger company.
Moreover, Usmanov’s recent statements suggest the possibility of cutting the minority parcel. “The partners we have negotiated with would only be happy if we enlarged. The asset consolidation process will go on, and it’s hard to say now what kind of configuration will be established in the end.”
Usmanov made an offer to Alexei Mordashov, the owner of Severstal, who would be anything but a minority shareholder. Usmanov’s partners Vasiliy Anisimov and Andrei Skoch would hardly let him reduce their stakes.
In fact, Usmanov has nothing lucrative to offer ISD. He has an in with the Kremlin and he could help ISD have a hand in constructing a steel mill in Armavir, Krasnodar province. However, the project is worth USD 250 million - 350 million – too little to go, cap in hand, to the Kremlin.
All talks about buying cheaper natural gas from Russia are groundless. The sole authorized exporter is Gazprom and it would hardly sell lower.
ISD’s response to the allegations of a possible merger with Gazmetall was far more reserved. At the onset of the price war with the Ingulets ore mining and dressing factory in late December, Sergey Taruta accused its owner Vadim Novinsky of blocking supplies of raw materials to ISD plants and said that Russian suppliers were “in it” as well. Considering the close ties between Usmanov and Novinsky, experts presume that Taruta meant the Lebedin and Mikhailovsky ore mining and dressing factories. Who would negotiate a business alliance in such a state of war?
According to Alexander Pylypenko, vice president of Industrial Group, the ISD managing company, “top managers have negotiated some issues of management relations… If it comes to majority and minority stakes, the merger turns into absorption, which is unacceptable to ISD. Things will clear up in seven or eight months, after the two expert groups complete their work.” As we can see, it is three times longer than Usmanov expects.
So far, ISD and Gazmetall have only reached a tentative agreement on ore concentrate supplies to ISD plants starting from the second quarter of this year. That leaves Novinsky out, but doesn’t mean anything like a “business alliance.”
Besides, unlike Gazmetall, ISD has not consolidated the shares of its enterprises. Its owners plan for an asset evaluation in late 2007 and primary distribution of shares abroad in late 2008, at best.
Konstantin Litvinov, an ISD representative in Poland, was more outspoken, “We talked of cooperating, not merging with Gazmetall.” As he noted, Usmanov is interested in spreading the rumors about “absorption”: standing at the threshold of the London Stock Exchange, he wants to make Gazmetall shares more attractive.
Meanwhile, recent statements by competitors have added skepticism about the alleged ISD-Gazmetall merger. Mittal Steel representatives have disclosed that they are going to found a consortium for completing the construction of the Kryviy Rih oxidized ore mining and dressing factory. Among its potential stakeholders, they mentioned the Illich metallurgical plant and… ISD. “We have received positive responses from both. Negotiations are underway. We are going to sign an agreement of intent.”
The statement sounds quite surprising, considering the fact that the winner in the tender for completing the Kryviy Rih factory is already known. Besides, National Security and Defense Council Secretary Vitaliy Haiduk (a co-owner of ISD), supervises the construction project…
Metalloinvest, a company that belongs to Gazmetall, has announced several times since early January that it has embarked on that project. The Russians are confident that the new Ukrainian government will not revise the previous cabinet’s decision in favor of any other investor.
As we can see, there is nothing serious going on, except for the traditional Ukrainian-Russian contest. Each player is after his own ends and the outcome is unknown. One might get some advantage at the London Stock Exchange, another might get a lower price for iron ore or fuel. And someone may just be enjoying the game itself…
