August 6, 2008

Russia Metals Fight Brings Stake Sale Former Partner Buys 16.6% of Norilsk Nickel for $10 Billion

By Andrew E. Kramer

The Russian metals tycoon Mikhail Prokhorov announced Tuesday that he would sell a minority stake in the Arctic mining company Norilsk Nickel for $10 billion to his former business partner Vladimir Potanin, possibly ending a drawn-out ownership struggle between several of the richest men in Russia.

The two oligarchs agreed last year to divide their holding in Norilsk, an iconic and extraordinarily valuable Russian factory founded by Stalin, whose value soared along with high commodity prices in recent years. Norilsk is the world's largest producer of nickel, a key alloy in stainless steel.

And on Tuesday they announced the terms in a brief statement from Prokhorov's investment company, Onexim, in which Potanin agreed to pay a total of $10 billion for the 16.6 percent in the company.

That will come in a mix of $6.5 billion cash and 35.2 percent of the shares in another Russian mining company, Polyus Gold.

The deal would value Norilsk stock at $315 a share, well above its Tuesday close of $206.50 a share, and despite a drop in nickel prices lately because of concerns about a global economic slowdown.

Late last month, Prime Minister Vladimir Putin accused a large steel and coal mining company, Mechel, of tax evasion, causing its share price to collapse. The incident rekindled fears that his government might be aiming to nationalize some of the larger companies in the sector.

The Norilsk mine and smelter, which is in the town of the same name in Siberia, has been the subject of a lengthy ownership struggle. It had been majority owned by Prokhorov and Potanin since privatization in the mid-1990s, with each partner owning just above 25 percent. The pair, however, decided last year to split their holdings and form separate business empires.

Potanin said his decision to split with his longtime partner was prompted by Prokhorov's arrest in the French ski resort of Courchevel on suspicion of making prostitutes available at an upscale Russian Orthodox Christmas party. Prokhorov was later cleared of all charges. Analysts say the real reason centered on differences over how the pair would respond to state pressure to sell their holdings.

But the announcement on Tuesday sowed more confusion in this 18- month-old dispute between Russian oligarchs for control of one of the world's most valuable mines.

Prokhorov said last year he would sell 25 percent of Norilsk to another Russian businessman, Oleg Deripaska, and the two men said in April that they had closed the deal. That prompted speculation that Deripaska would seek to gain control over Norilsk and merge it with his aluminum operation, Rusal, to form one of the world's largest nonferrous metals companies.

The announcement Tuesday left analysts without an explanation of how this Russian businessman had come upon an additional 16 percent of one of the country's largest companies.

"It's all questions at this stage," Michael Kavanagh, senior metals industry analyst at UralSib, a bank in Moscow, said during an interview by telephone. "The 16 percent came as a big surprise."

Recent trading volumes for the stock were too low for Onexim to have amassed the stake on the open market, he said.

One possibility is that Rusal sold the shares back to Prokhorov, who in turn agreed to sell them to Potanin, and that the transaction signaled the unwinding of the expected merger between Rusal and Norilsk.

Kavanagh said another possibility was that this financing unraveled as a result of the liquidity crisis, prompting Rusal to reduce its purchase. Alternatively, he said, Deripaska might have lost political support for his takeover bid.

Originally published by The New York Times Media Group.

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