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. Last Updated: 07/27/2016

Sibneft Players Form $3Bln Holding

A group of Sibneft shareholders announced Wednesday that they have consolidated their oil, metals, aviation and other assets in a financial-industrial powerhouse called Millhouse Capital.

The new British-registered holding is worth $3 billion to $4 billion, comparable to the country's largest holding Alfa Group, analysts said.

Millhouse will manage an 88 percent stake in Sibneft, Russia's sixth largest oil company, a 50 percent stake in the world's No. 2 aluminum producer Russian Aluminum, and 26 percent of Russia's flagship airline Aeroflot, a Millhouse source said.

The holding will also manage controlling stakes in GAZ, Russia's second largest automaker, the Ingosstrakh insurance giant, the Nosta metals plant and medium-sized Avtobank. In addition, it will have stakes in Irkutskenergo, the Krasnoyarsk hydroelectric plant and the Ust Ilinsky pulp and paper plant.

Millhouse will be headed by Sibneft president Eugene Shvidler.

"The company aims to be a progressive force for change on the Russian corporate landscape," Shvidler said. "Millhouse will target undervalued assets where growth in shareholder value has been hindered by ineffective management, lack of investment or bad corporate governance."

The Sibneft shareholders behind the move are believed to be led by Roman Abramovich, who has said he owns 44 percent of Sibneft. Incidentally, Abramovich celebrated his 35th birthday Wednesday.

Millhouse was minted in the mold of Alfa Group, which manages Alfa Bank and Tyumen Oil Co. among other companies, and has about the same value -- $3 billion to $4 billion, said James Fenkner, equity strategist for the Troika Dialog brokerage.

"It might even be bigger than Alfa," said Eric Kraus, chief strategist at the NIKoil brokerage.

The only major holding, Interros, the slowly eroding metals and banking empire of Vladimir Potanin, is worth somewhat less, analysts said.

Calculating the precise value of Interros, Alfa and Millhouse is difficult because many of the companies in the holdings aren't actively traded.

Fenkner said Millhouse is an example of how industrial consolidations have fundamentally changed since the 1998 financial crisis.

"It used to be the financial arm that used to acquire assets for the industrial arm," he said. "Now, these industrial assets are the cash cows. Russian Aluminum is a massive cash cow."

Kraus agreed, saying that this new kind of holding is healthier than the groups formed in the mid-1990s, such as the now-defunct Menatep, that drew much of their revenue from speculation-prone banking divisions.

"The most logical reason for this is to consolidate the cash flows of the different companies," Kraus said. "Everything suggests that Sibneft isn't holding to its stated intention of behaving like a public company."

Although the appearance of Millhouse marks a new stage of consolidation, it does little to quell corporate governance concerns.

"Millhouse doesn't really change anything," Fenkner said. "It doesn't give any more information as to who the beneficial owner or owners really are."

When potential investors are left in the dark, they aren't able to calculate the owners' incentives, thus making investments riskier.

Sibneft shares showed little reaction to the Millhouse announcement, closing down a mere 0.4 percent at $0.60. The shares had plunged 10 percent a day earlier after a late Monday night conference call in which management told investors that a 27 percent stake of Sibneft -- acquired from the main shareholders and held in the company's treasury -- had been sold back to the same shareholders, who will receive dividends on the shares.

Sibneft executed the sale without consulting with the board, and market watchers said the transaction was probably made at the oil company's loss.

Sibneft said Wednesday that Millhouse was created as an umbrella in which assets will be set apart to avoid a threat of cross-subsidization. When structures close to Abramovich began buying up Aeroflot shares earlier this year, Sibneft minority shareholders expressed concern that Sibneft cash would be used to subsidize the airline.

Millhouse will work with oil trading company Nafta-Moskva and Siberian Aluminum, controlled by businessman Oleg Deripaska, to strengthen Avtobank's and Ingosstrakh's position on the market, the three companies said in a statement. Siberian Aluminum controls the other half of Russian Aluminum.

Millhouse, Siberian Aluminum and Nafta-Moskva will cooperate in improving Nosta's financial performance, the companies said. Nosta shareholders have already signed a contract with Russian Aluminum for assistance in reforming the beleaguered metal plant.

Analysts said Sibneft's recent activities paint the portrait of a private company that exists for the benefit of its majority shareholder. Company officials don't appear interested in pushing ahead with previous plans to list a level-3 American Despositary Receipt. Eugene Tenenbaum, an adviser to Shvidler, said Sibneft would aim for the issue next year if market conditions improve.