Analysts sure RusAl will decline Norilsk Nickel buyback at offered price
MOSCOW. Aug 22 (Interfax) - Russian Aluminum, from which Norilsk Nickel is offering to buy back 15% of its own shares, will again reject the offer, even though the offer includes a 35% premium over share price and RusAl would gain an opportunity for early debt paydown with the proceeds, most analysts surveyed by Interfax agree.
The analysts think that in the wake of a RusAl rejection Norilsk Nickel will announce a buyback at the aluminum company's offer price, and that such terms will be advantageous to Norilsk Nickel's main shareholder, Vladimir Potanin's holding Interros.
The offer to RusAl is for some 15% of Norilsk Nickel shares at $306 apiece for an overall roughly $8.75 billion. The aspects of the offer will be addressed at an in-absentia Norilsk Nickel board of directors meeting slated for August 24. If the board approves the offer, it would be good until September 5. RusAl has again stated that it considers its investment in Norilsk Nickel strategic, but will look at it "in line with the procedures of corporate governance."
Norilsk Nickel could borrow some $4.25 billion on the market to pay for the shares, and the other $4.5 billion would come out of its own coffers and from "available financial instruments," the company said.
The offer price was no surprise; market operators had been discussing a price of around $300 per share (the price of the final deal with Norilsk Nickel shares on the MICEX on August 18 was $226), although it was initially thought the buyback would be done at a price comparable to the last offer to RusAl - $336 per share. News of the offer price helped push Norilsk Nickel shares look better than market: the stock ended August 19 up 0.22% where the MICEX index closed down 1% (it had slumped 4.03% by 3:00 p.m. Moscow time).
The offer price reported on Friday involves a premium identical to the premium from Norilsk Nickel's February offer ($336 per share), UBS analyst Kirill Chuiko notes. Since the offer, quotations for Norilsk Nickel shares slumped almost 10%, and the premium decreased commensurately, he said.
Fifteen percent is the proportion, having cancelled which together with treasury shares [9.23% at Norilsk Nickel subsidiary Corbiere], Interros and Trafigura would obtain control over Norilsk Nickel, Chuiko said.
It would be logical if Norilsk Nickel secures financing for the deal with RusAl from Sberbank of Russia (in 2010, Sberbank refinanced a VEB credit to RusAl of $4.5 billion raised by the aluminum company to buy a blocking stake in Norilsk Nickel), Chuiko figures. That would allow RusAl to settle up with Sberbank.
"The deal would help RusAl pay down a large part of its debts, but the company is quite likely to reject it," Chuiko said.
It is possible, that Norilsk Nickel has already raised some of the funds, needing money in any event, and if RusAl refuses the offer, a buyback lies ahead, Chuiko thinks. In his estimation, that buyback would transpire at a price analogous to the price offered RusAl, and Norilsk Nickel would during the course of it acquire around 5% of its own shares for roughly $3 billion.
Dmitry Smolin at Uralsib also thinks Norilsk Nickel would acquire 5%-6% of its shares at $306 apiece for an overall $3-$3.5 billion. Paying for such a buyback would be easier for the company than raising financing for an $8.75-billion deal. Smolin does not think Norilsk Nickel has $4.5 billion in its coffers, though raising such an amount is entirely within the range of possibility, and Norilsk Nickel could borrow some of it from banks it already has credit lines with.
"The offer itself, like the price and volume, speak to Norilsk Nickel and Interros not believing that it will be accepted by RusAl. RusAl, most likely, will not be changing its views and will reject it," Smolin said.
Norilsk Nickel has also announced a buyback for all shareholders at a price of $306. "A buyback with a 35% premium is being conducted in the interests of Interros, which is taking advantage of the opportunity to sell as large a stake as possible," Smolin said.
If RusAl accepts, Norilsk Nickel - which does not possess significant debt - will not have a problem with raising a credit to buy the aluminum company's stake, Alexander Pukhayev at VTB Capital thinks. Part of the stake could be used as security for a credit raised.
"It's possible that liquidity has enormous meaning in the current situation on the markets. On the other hand, RusAl did not previously agree. Has the conflict reached a point where RusAl is ready to give in? I'm not sure," Pukhayev said, noting that the positions taken by RusAl shareholders are going to be important (Mikhail Prokhorov's Onexim group and Viktor Vekselberg and Leonid Blavatnik's Sual Partners had supported Norilsk Nickel's previous offer).
A credit of $4.2 billion will not suffice for Norilsk Nickel, since the mining giant does not have $4.5 billion in free monies, he said. If RusAl accepts, Norilsk Nickel will require a credit of around $7 billion, he said.
Norilsk Nickel has since the year began already expended on two buyback phases and dividends more than $5.7 billion ($4.5 billion - buyback, and $1.25 billion - dividends), and the deal with Trafigura brought the company just $2.7 billion. Cash money in Norilsk Nickel accounts stood at $5.4 billion on December 31 last year. The company did not publish an International Financial Reporting Standards (IFRS) report for the first half, and reliable information on company cash is not to be had.
Norilsk Nickel - whose 2011 forecast for EBITDA (earnings before interest, taxes, depreciation, and amortization) is $8 billion - could raise $7 billion without it imposing any serious restrictions on how it can act. Nor would such a loan cause Norilsk Nickel's credit rating to undergo any serious worsening, but the company is not likely to need such a credit. "RusAl will decline, in all probability. The likelihood of agreement is just 10%," Pukhayev said. Norilsk Nickel will then announce a buyback at $306, and that is in Interros's favor, he said.
Vladimir Zhukov at HSBC views the offer's terms as favorable, and thinks that the aluminum company may decide to sell some of its Norilsk Nickel shares. "The offered price, although less than the previous Norilsk Nickel offer, is fully appropriate and attractive - considering the correction on the markets, and the uncertainty as to the movement of the world economy and stock markets. The deal gives RusAl an opportunity to avoid a repeat of 2008, if events develop in an analogous scenario. And if events take a turn for the worse on global markets, in particular metals prices falling along with the market for shares, then RusAl will have to think hard about this proposal. That's why the likelihood of Norilsk Nickel's offer being accepted is higher than it was earlier," Zhukov said.
Norilsk Nickel is fully capable of raising $4-$5 billion without significant encumbrance or security, and the cost of financing will be relatively inexpensive, considering that Norilsk Nickel has a small level of debt, he said.
Norilsk Nickel has made a buyback offer to RusAl, which holds a blocking stake in the mining company, twice - last December and this past March. The initial offer for RusAl's stake was $12 billion, subsequently - $12.8 billion for 20% of shares. Neither offer was accepted.
After the first, Standard & Poor's put Norilsk Nickel's rating on CreditWatch with an outlook of "negative." When RusAl declined both offers, S&P did it again, saying the move was due to concerns about possible corporate governance and company management shortcomings against a backdrop of no audited international financial report. That report was soon issued, but S&P did not remove the company's rating from CreditWatch - this time because of reports a new offer was in the works.
"Our decision to keep the ratings on CreditWatch negative follows approval by the board of Norilsk to make a new offer to its 25% shareholder UC RUSAL (not rated), as well as to minority shareholders, to repurchase its shares. "We believe that this offer, if it proceeds, could weaken Norilsk's financial metrics and liquidity below the level we view as commensurate with a 'BBB-' rating," S&P said in a press release. "In 2010, Norilsk reported $7.2 billion EBITDA, up 62% from 2009. As of year-end 2010, Norilsk's reported cash balances of $5.4 billion substantially exceeded its reported on-balance-sheet debt of $2.8 billion," the rating agency noted, however.
As reported, the Norilsk Nickel board of directors decided on August 15 that the buyback was appropriate. The board also asked management to make an offer to buy shares from RusAl before the buyback is carried out. The offer must be made within ten days of the board meeting. Larisa Zelkova, a member of the Interros executive board and of the Norilsk Nickel board of directors, told Interfax that there would not be an offer to Norilsk's minority shareholders if RusAl accepts the offer. She said an offer would be made to minorities on the same terms if RusAl rejects the offer.
The board did not discuss the buyback offer volume or price, limiting itself to approval in principle.
RusAl thinks the buyback decision was made exclusively in the interests of Interros (the holding holds roughly 30% of the mining company's stock and is better-represented on the board of directors than its opponent in the conflict).
Interros controls up to 30% and Rusal - 25.13% of Norilsk Nickel. Metalloinvest owner Alisher Usmanov owns 4% but plans to increase his stake to 5%. Corbiere bought up 9.23% of Norilsk Nickel charter capital during the two buyback phases this year (6.8% for $3.29 billion in the first and 2.38% for $1.2 billion in the second). According to official information, 8% of Norilsk Nickel's shares have been sold to Dutch commodities trader Trafigura, but the latter has not acknowledged being the final beneficiary in those deals.
