Can Foreign Partner Rescue AvtoVAZ?

A tie with another game in three months.


That seems to be the verdict from analysts on the deal struck between the government and AvtoVAZ under which the government has dropped bankruptcy proceedings over back taxes and the auto giant has promised to get serious about finding outside investors.


Under the deal announced Tuesday, the government has committed to hold off on bankruptcy proceedings against AvtoVAZ; in exchange, the company must double its share capital with an issue of new shares to a strategic investor or to portfolio investors.


Some analysts said that the commitment from AvtoVAZ to let in new investors does give the government some leverage to recover the 3 trillion rubles ($500 million) of back taxes owed by the plant.


Maxim Matveyev, an auto analyst at Rinaco Plus, said the deal was "already a victory [for the government] because all previous attempts [to make AvtoVAZ pay its taxes] ended in nothing."


"Before, the company just had its debts restructured and that was that," he said.


But the suspension of bankruptcy proceedings looked like a government back-down and analysts on Wednesday wondered whether, given the problems at AvtoVAZ, the share issue -- which is all the government has won in return -- was realistic.


"Who's going to buy the stock?" said Gavin Rankin, head of research at Troika Dialog investment company. "Why would I waste my money at raising money for the plant to pay off its government debt?"


AvtoVAZ has been able to thumb its nose at the tax man thanks to its size and its close links to the government. Chairman Vladimir Kadannikov served as deputy prime minister for economics until a few months ago.


Another ally, Konstantin Titov, the governor of Samara region where AvtoVAZ is based, said Wednesday the plant was no longer threatened with a bankruptcy procedure and that earlier government bankruptcy fever was based on "some disappointing misunderstanding."


Titov said First Deputy Prime Minister Vladimir Potanin, who met in Moscow on Tuesday with AvtoVAZ managers and regional officials, conceded to stop bankruptcy proceedings in exchange for the additional share issue, which must take place in the next three to four months.


According to Titov, the government also conceded to sell the shares from the additional issue in small chunks rather than a single package, in order not to allow one single investor to obtain a controlling stake in the enterprise, Interfax reported Wednesday.


AvtoVAZ officials said they would hold a news conference in Moscow on Thursday to comment on the deal.


Pyotr Mostovoi, chairman of the federal bankruptcy agency, told a press conference Wednesday that he was confident the plant would go along with the proposed additional share issue because "the enterprise is still under threat of bankruptcy."


Under the deal, AvtoVAZ management will "ask" company shareholders at an emergency shareholders meeting to approve an additional issue of shares equal to the plant's existing capital. New shares could be sold either in one chunk to a strategic investor or split into small packages and offered to portfolio investors.


Potanin said Tuesday that the planned share issuance at AvtoVAZ was worth "hundreds of millions of dollars rather than tens of millions." However, even this amount may not be enough to cover all of AvtoVAZ's 3 trillion rubles in tax debts, which the government agreed to partially restructure as part of the deal. AvtoVAZ has a total of 11 trillion rubles in arrears on its books.


Potanin said companies that could be approached as strategic investor in AvtoVAZ include BMW, Ford Motor Company, and Opel group, a division of General Motors Germany.


Of those, GM and Opel would appear the most likely partners. AvtoVAZ already uses a GM fuel-injection system and has further plans to install Opel's two-liter engines in its newly released Lada-2110 model.


Neither GM or Opel representatives were available for comment. A representative of Ford in Moscow said Wednesday that neither the Russian government nor AvtoVAZ management had even approached the company recently with business proposals.


However, while AvtoVAZ management protested last week that the bankruptcy talk was designed to redistribute the company's property into the hands of "a few existing clans," analysts said it was hard to envision any foreign or domestic investors willing to take on AvtoVAZ's liabilities.


"They don't like to come in and solve all of the government's problems. The government should basically take responsibility of existing problems," said Rankin of Troika Dialog.


But without a proper strategic investor, an AvtoVAZ share issue would also represent "very limited" interest to portfolio investors because "no one will have any faith in this company being able to turn itself around," he said.He said the AvtoVAZ restructuring was an "enormous project" that would scare off the world's motor vehicle companies who "don't like to jump into something when they have no idea of what's going on there."