Rusal, Russia’s de facto aluminium monopoly, has completed a US$2.2bn initial public offering (IPO) in Hong Kong that should reassure creditors owed nearly US$15bn. It has been hailed as preserving the control of Rusal’s leading shareholder and CEO, Oleg Deripaska. However, Rusal was so risky an investment that Hong Kong placed unusual restrictions on the IPO. Threats to the company include lawsuits in London from alleged dispossessed shareholders; a conflict with the government of Guinea, on which Rusal depends for bauxite and alumina; and the risk that Russia’s government will one day decide to take over the company. The increase in state ownership of Rusal and the government’s role as a principal creditor can be regarded as reassuring signs of support for Mr Deripaska; but they could later become tools to bring him down.
Rusal successfully completed its IPO in Hong Kong on January 27th, placing a reported 10.6% of its stock for a price of US$2.2bn. The shares were sold at HK$10.80, which was in the middle of the HK$9.10-12.50 price range, although by the end of the week they had fallen to HK$9.66.
A combination of the freezing-up of the global financial system, plus a collapse in demand for aluminium in late 2008, put Rusal—which says it produces 11% of the world’s aluminium and 13% of its alumina—into dire straits. It was only saved by an emergency US$4.5bn loan from state-owned Vneshekonombank (VEB), even though this exceeded VEB’s guidance on lending levels. That loan was rolled over for another year in September 2009. However, Rusal still had more debt due than it was able to pay, so it announced a debt standstill and entered restructuring talks with over 50 institutions that were together owed US$16.8bn. The talks resulted in a four-year holiday on principal repayments to international banks, and a US$1.8bn cut in the total debt level via an equity swap deal with Mikhail Prokhorov, a Rusal shareholder.
The creditors pushed Mr Deripaska to list the company in order to raise funds to begin loan repayments. Nearly all of the proceeds from the IPO will go to paying down the debt. Moreover, the company does not expect to pay dividends over the next four years and has little scope to pursue acquisitions; its principal focus will be debt repayment.
Risky venture
Rusal turned to Hong Kong after being rebuffed in London. It experienced difficulties in Hong Kong too, and the prospectus included several unprecedented restrictions. In particular, the IPO was limited to those investing a minimum of HK$1m (US$130,000). In red type, the Hong Kong exchange warned that Rusal was a risky investment that should only be taken up by those who could afford to be wiped out. It noted that Rusal did not meet the profit test for listing, and pointed to the company’s vast debt burden.
Data on who bought Rusal stock is not easy to come by. It has been widely reported that four ‘cornerstone’ investors together took up 39% of the shares on offer: VEB, New York investment firm Paulson & Co, UK investor Nathaniel Rothschild and Malaysian businessman Robert Kuok. Separate reports state that Hong Kong businessman Li Ka Shing bought shares worth US$100m, and that the two largest investors were VEB (buying 3.15% of Rusal for US$633m) and the Libyan Investment Authority (1.43% for US$300m). Before the auction, another Russian state bank, Sberbank, said it too would participate in the IPO. At the time there was some suspicion that the state’s proxies had agreed to participate in order to ensure that Rusal’s market capitalisation exceeded its debt.
Multinational threats
The cornerstone investors have agreed to hold the stock for at least six months. The downside of their being unlikely to receive any dividends for the next four years is arguably overcome by the potential for an increase in the share price as the global economic recovery gathers pace and demand for aluminium ticks up. Rusal is not only a huge aluminium producer; it is also one of the lowest-cost producers. Despite this, its shares trade at a discount to other big aluminium firms, because of attendant risks.
The first, which Mr Deripaska says is a personal issue that does not affect the company, concerns a lawsuit in the UK by Mikhail Chernoy, who says that he owns 13% of Rusal. In July 2008 Justice Christopher Clarke ruled that the case should be tried in England and that Mr Chernoy had a “reasonable prospect of success”. If Mr Chernoy were to win, Mr Deripaska would either have to surrender shares or sell them to compensate Mr Chernoy. Either eventuality would be potentially destabilising for the company.
Second, the government of Guinea last year initiated court proceedings to annul the 2006 privatisation of the Kindia alumina refinery and is seeking US$1bn compensation from Rusal. The Russian company also owns a bauxite mine in Guinea, whose output is essential if its aluminium plants in Russia are to operate at full capacity. Nationalisation of its assets in Guinea would deal a serious blow to Rusal’s operations.
Kremlin call
For Russia’s government, the preservation of Rusal as an entity is of huge importance. The company employs over 50,000 people in its plants and mines in Russia. Delays in paying wages at one Rusal facility earlier this year caused protests that were sufficiently serious to prompt Vladimir Putin, Russia’s prime minister, to intervene directly. Added to this social element is a large financial one. Russia earns between US$6bn and US$7bn per year by exporting aluminium, which amounts to nearly 20% of total export revenue. (Even these numbers may understate the value of aluminium exports, as in the past transfer-pricing has been used, resulting in part of the profits being moved offshore.) If the overseas assets are lost, the Russian core will not be able to operate at full capacity.
Preservation of Rusal as an entity does not necessarily mean the preservation of Mr Deripaska’s control over the company. This is a pertinent distinction because the state has increased its control over the oil sector in recent years while retaining a monopoly on gas, gold and diamonds. If state ownership is to extend further, aluminium and other metals would be a logical destination. Although there is more processing involved, in essence the business involves digging minerals out of the ground in Russia and exporting them abroad for huge profits. In the case of aluminium, the business model also depends on the availability of huge quantities of cheap power (provided in Rusal’s case by state companies).
Thus far, the government has shied away from taking over Rusal, perhaps because it fears the challenge of directly controlling a large and severely distressed enterprise. Thus the authorities have indicated that they will extend the US$4.5bn loan for another year (50% via VEB and 50% via Sberbank) and they have pushed VEB (and perhaps Sberbank too) to support Rusal by participating in the IPO.
Ostensibly, Mr Deripaska remains the master of Rusal, with a shareholding of roughly 46% (most of the rest of the stock is owned by Russian tycoons; Swiss trader Glencore has just under 10). However, it is possible that the terms on which state aid was extended to him are more onerous than publicly acknowledged. In Europe and the US, bailouts of the kind extended to Rusal have been accompanied by full state control. Moreover, the support that the government has extended to Rusal could be used to wrest control of the company from his control, either formally or informally. If the main reason why the government opted to keep Mr Deripaska in place was because it was wary of taking over a teetering enterprise, what will happen if Rusal returns to health? VEB has already signalled its interest in Rusal’s 25 stake in Norilsk Nickel, which is to the global nickel business was Rusal is to aluminium. But conceivably the authorities’ interest in a revived Rusal could be on a grander scale.