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Severstal to Acquire 6 Suppliers
Steelmaker Severstal said Wednesday that it planned to take control of a number of its raw material suppliers owned by its chairman and key shareholder, Alexei Mordashov, in a bid to improve transparency.
The move, which will be handled through an issue of new shares, could add as much as $4.3 billion to Severstal's market value, sparking speculation that the steelmaker may be considering a listing abroad or an acquisition in the medium term. Moscow-listed Severstal's market capitalization stands currently at just over $7 billion.
"Consolidation is an important step in the development of our company as a national steel and raw minerals producer that can compete in Russia and widen its global market presence," Mordashov said Wednesday in a statement. Mordashov owns 84 percent of Severstal.
Under the deal, Severstal will issue 395.7 million new shares, 84 percent of which will go to Mordashov, in line with his holding in Severstal. In return, Mordashov will hand over control of six iron ore and coal suppliers, currently held through the Cyprus-registered firm Frontdeal. Minority shareholders in Severstal will also receive new shares in proportion to their existing holding in the company.
The new shares will boost the steelmaker's equity capital by 72 percent.
Novolipetsk chairman Vladimir Lisin recently made a similar move in selling several raw material suppliers, which he owned personally, to help the steelmaker boost its transparency.
Mordashov said the deal would help Severstal avoid accusations of transfer pricing, the practice of setting prices unrelated to market levels for internal transactions.
Accusations of transfer pricing have dogged Russian metals producers as they seek to bring their business practices in line with Western standards. Last week, the Audit Chamber decided that the country's largest steelmaker, Evraz Group, used offshore traders to export domestic steel at below-market value, hence avoiding higher taxation, Vedomosti reported.
Severstal expects the deal to be approved at its shareholders' meeting on March 27 and cleared by the summer by regulators.
Moscow's brokerages welcomed the deal, saying it pointed to plans for a flotation abroad or an acquisition.
Severstal head of investor relations Dmitry Druzhinin denied Wednesday that the company wanted to list abroad, but conceded that the steelmaker "has some acquisition projects that our experts are looking at."
The steelmaker lost out on last year's tenders for Turkey's Eredimir and Ukraine's Kryvorizhstal. Severstal sees no similarly attractive acquisitions at this moment, but "it's a question of cost," Druzhinin said.
One possible acquisition target for Severstal in the medium-term could be British steelmaker Corus, Societe Generale analysts said Wednesday.
Dropping profit margins in steelmaking, due to lower steel prices and a rise in iron ore and coal costs, have made high-cost European steel producers seek mergers or acquisitions with emerging markets manufacturers, said Julien Rauffelsbauer, an analyst with Societe Generale in London.
The companies currently held by Mordashov's Frontdeal are coal miners Vorkutaugol, Vorgashorskaya, Pervomaiskaya and Berezovskaya, as well as iron ore producers Olenegorsky and Karelsky.
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