Norilsk Deal Shaky Ahead of Vote

United Company RusAl's multibillion-dollar bid for a blocking stake in Norilsk Nickel, the world's largest nickel and palladium miner, is hanging in the balance amid reports that Mikhail Prokhorov's Onexim Group is objecting to a key clause in the deal.

Ahead of an extraordinary general meeting Tuesday, where Norilsk shareholders are to vote on proposals put forward by Onexim, a source close to RusAl shareholders said Monday that Prokhorov was seeking to change the terms of a deal that would pave the way for the creation of a $100 billion mining giant.

"Onexim is trying to get out of [the deal that was] signed in November," said the source, who spoke on condition of anonymity because of the sensitivity of the situation. "They are not directly saying 'no,' but they are trying to change the terms they committed to and signed in November."

In November, RusAl agreed to buy 25 percent plus one share in Norilsk, which it has heralded as the first step toward a full merger of the two companies to create an entity capable of challenging international majors in the global hunt for assets. RusAl had hoped to close the deal by the end of March but recently said the deadline had been pushed back until the end of April.

"RusAl has fulfilled all its obligations and is ready to close the deal," the source close to RusAl said.

Vladimir Potanin, the other main shareholder in Norilsk, via his holding company Interros, is widely reported to have been negotiating behind the scenes to fend off RusAl's advances and prevent a merger from going ahead. He appeared to win a key victory when Norilsk confirmed in February that it was considering an offer from Alisher Usmanov's Metalloinvest on a possible merger.

RusAl and Onexim Group both refused to comment Monday.

Signs that the deal might be unraveling emerged last week, after Onexim challenged a clause in the terms set out by RusAl. Prokhorov is reportedly unhappy with a clause requiring the early repayment of $4.5 billion in debt to overseas banks should RusAl not conduct an initial public offering by Nov. 1, 2009.

Norilsk's shareholders are scheduled to gather at the extraordinary shareholders' meeting Tuesday for the key vote, where Norilsk's management has urged investors to cast their ballots against Onexim's proposed changes to the board, which would include three representatives from RusAl.

Potanin and Prokhorov's investment vehicle, KM-Invest, which holds an 8 percent stake in Norilsk, indicated Friday that it would support Norilsk's management at the vote. Earlier, the two businessmen agreed not to liquidate the holding, a move which analysts have interpreted as a sign that the two might have reconciled some of their past differences.

Analysts said they expected shareholders to back a move to keep the board unchanged.

The two billionaires have been mired in a protracted asset split -- with Norilsk as the main jewel -- since early last year. Potanin had a pre-emptive option to acquire Prokhorov's stake, but his approaches to a number of banks failed to raise the required $15.7 billion within the short time frame he was allotted. His spokespeople, however, have maintained that Potanin never even attempted to raise the money, as he viewed the terms as unreasonable.

RusAl subsequently stepped in to scoop up the stake in a cash and equity offer reportedly worth $12.7 billion. Under the deal, Prokhorov is to receive an 11 percent stake in RusAl and a seat on the board. Russian and foreign media have reported that Prokhorov would receive $4.5 billion in cash upfront and a further $2.8 billion to $3 billion in deferred payments.

Prokhorov would also hold an option allowing him to sell his stake in RusAl back to the company by 2010. If RusAl is forced to pay off its $4.5 billion in bank debts early, there is concern that it may not be able to buy out Prokhorov's 11 percent stake, analysts said.

"If this deal broke, it's not clear who would be the breaker," said Michael Kavanagh, a metals analyst at UralSib. "Prokhorov might be objecting, but it might also be that Deripaska has failed to come up with financing under reasonable terms."

The source close to RusAl shareholders said the company would take legal action if Prokhorov reneged.

"If they don't close the deal, RusAl will go to court and will definitely ask for compensation, which will amount to billions of dollars and will no way be limited to the $300 million [breakup fee] mentioned in the press," the source said.

But some analysts were reluctant to declare the deal a no-go yet, noting that intense negotiations were still taking place ahead of Tuesday's shareholders' meeting.

"Until the deal has been officially called off, I would hesitate to say it's dead," said Vladimir Zhukov, a metals and mining analyst at Lehman Brothers. "But all the recent events point in the direction of this deal falling apart."

He outlined an alternative scenario, whereby Norilsk could buy Metalloinvest, after which Metalloinvest could do a back-to-back cash deal with Prokhorov for his stake.

"Metalloinvest can propose better terms, at least in terms of upfront cash," Zhukov said.

A spokeswoman from Metalloinvest declined to comment Monday.