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. Last Updated: 07/27/2016

NEWS ANALYSIS: Leningrad Factory Set to Issue Shares




ST. PETERSBURG -- In a move that will close out a year-long battle for control, Russia's leading manufacturer of turbines for electrical power stations, the Leningrad Metal Factory, or LMZ, is set to issue 14 million common shares.


The move will likely allow Vladimir Potanin's Interros Group to seal its control of the enterprise.


LMZ will issue the shares, which will more than double the company's current share capital and dilute current shareholders' stakes by a factor of two, some time in the next month or so, Yevgeny Gulyayev, the factory's external manager, said last week.


According to an agreement between LMZ's external manager and council of creditors - also headed by Interros - the factory's creditors have first option to purchase the shares.


After the factory's creditors sued LMZ last year over debts totaling some 350 million rubles, a St. Petersburg court decided against bankruptcy for the firm and instead placed the enterprise under the dual control of an outside manager and a council of creditors.


The creditors council was originally headed by German engineering giant Siemens AG, but that company sold its debt of about 290 million rubles to Interros in early January. Siemens retains ownership of a 10 percent stake in LMZ.


"The new share issue will raise enough money to allow the company to pay off its debts and avoid having to dip into the company's working capital," Gulyayev said.


After the share issue, Interros will increase its stake in LMZ from 16 percent to a more than 50 percent stake.


Another major creditor, Lenenergo, the monopoly energy provider for St. Petersburg and the Leningrad region, will have a 15 percent stake.


Interros' shares will officially be owned by its subsidiaries, Balt-Uneximbank and Moscow-based Rosbank, the main financial institution in the Interros group.


Officials from LMZ's other leading shareholders, Energomash Korporatsiya, which owns about 35 percent, and Siemens, were unavailable for comment.


However, EMK director Alexander Stepanov said last autumn that he does not recognize the legitimacy of LMZ's council of creditors, and will challenge in court any move they take to dilute his company's holdings.


LMZ was previously a member of EMK, a holding company which once united 26 Russian engineering companies. LMZ left EMK in early 1999 after a boardroom dispute over the holding's attempt to consolidate control over its constituent parts and create a single share for all the factories.


With the share issue scheduled to go ahead, analysts see a major defeat for EMK.


"The share issue is certainly in the interest of Interros because it gives them the opportunity to gain control of the factory officially," said Alexander Golovtsov, head of over-the-counter trading at Lenstroimaterialy, a St. Petersburg brokerage house.


Golovtsov said LMZ was attractive to Interros because of the firm's capacity to earn hard currency.


"LMZ has significant export contracts, which will increase to $34 million this year. Also, Interros has good relations with [UES chief executive Anatoly] Chubais, and UES plans to carry out a modernization of its power stations, especially with the help of St. Petersburg engineering companies like LMZ, Electrosila and ZTL," he said.


Unified Energy Systems runs Russia's national power grid and holds majority stakes in most of the regional power suppliers, known as energos. While Lenenergo is an exception to that rule, UES exercises effective control of the firm through its 49 percent stake.


Last summer, Chubais said "billions of dollars" will be invested for the modernization of Russian power stations over the next five years, and that St. Petersburg engineering companies will play a vital role in the process.


"Interros considers the power engineering industry to have significant potential and we will act to develop these factories," Yevgeny Yakovlev, an Interros board member, said last week.