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. Last Updated: 07/27/2016

Interros Dumps Stake in NLMK

Interros and its flagship Norilsk Nickel announced Tuesday that they have sold off their combined 34 percent stake in No. 3 steel major Novolipetsk Metallurgical Plant, a move that comes less than a week after the United States slapped sanctions on Russian steel.

Renaissance Capital led a consortium of international financial investors in the multimillion-dollar deal and itself bought into the stake, said Richard Olphert, managing director of investment banking at Renaissance Capital.

Interros Holding and Norilsk Nickel both said the consortium includes a current shareholder in Novolipetsk Metallurgical Plant, or NLMK.

NLMK's ownership structure is unclear. Stinol-Invest holds 61.4 percent in nominal ownership, and the lion's share of that stake is believed to be controlled by NLMK chairman Vladimir Lisin. As such, market analysts said that Lisin was mostly likely the figure behind the consortium.

The sale ends a stormy relationship between NLMK and Interros, which unsuccessfully fought to have a say in the plant's strategic development. Interros managed to block two additional share emissions but failed to stop NLMK's sale of the Stinol refrigerator maker to Italy's Merloni for $119.3 million in October 2000.

"We are satisfied not only with the financial conditions of the deal but, more important, it is the end of a dispute between NLMK shareholders," said Interros general director Andrei Klishas.

Interros said it made a profit on the sale.

"We welcome the arrival of new shareholders and are sure that this event will have a positive effect on Russian and foreign investors' perception of NLMK," Lisin said in a statement.

Interros bought a 34 percent stake in the plant in 2000 and then sold 9 percent of those shares to its Norilsk Nickel subsidiary, according to industry analysts. The Vedomosti newspaper said the 34 percent stake was purchased for about $170 million.

According to its 2000 IAS financial results, Norilsk Nickel paid about $220 million for its 9 percent stake.

Troika Dialog analyst Vasily Nikolayev called the $220 million "a massive overpayment." "This [price] would be possible if Interros bought the shares and sold a stake to Norilsk at a highly inflated price," he said.

Analysts said the current value of the plant, based on a comparison with rival Severstal, is $500 million to $1.2 billion, meaning Norilsk Nickel and Interros' combined stake is worth $170 million to $400 million.

"This is not to say that the deal price is the same thing as the valuation. There could be premiums because of the size of the stake and discounts because NLMK is not as transparent," said Slava Smolianinov, metals analyst at NIKoil.

Norilsk Nickel was expected to announce the price Wednesday.

Although Norilsk Nickel stands to take an overall loss, analysts said the sale was in the company's best interest. "There is nothing they can gain from holding these shares," Nikolayev said. "The sale is fixing the mistakes that they made earlier."

Despite the depressed global steel market -- and NLMK's own warnings about the impact of recently imposed U.S. steel tariffs -- Renaissance Capital's Olphert said the company's shares are undervalued compared to international companies and have strong growth potential.

NLMK has estimated that the company could lose up to $150 million in sales because of the U.S. tariffs and potential knock-on effects in other markets. Its main export to the United States, slabs, are not subject to the tariffs.

NLMK had preliminary revenues of 37.2 billion rubles ($1.3 billion) in 2001 under Russian accounting standards, and overall production volumes fell 2.6 percent to 3.8 percent.

"The company has tremendous potential," Olphert said. "There is a pricing issue -- it's been deadlocked between the shareholders up to date and as part of the transaction the deadlock gets removed. There is a common view among the new and existing shareholders as to how the capitalization of the company can be further developed."

One of the options being discussed is making the company public, Olphert said.

Interros said it is pleased with the timing of the deal. Global steel markets may be settling in for a lengthy depression, and the domestic agricultural sector looks ready to take off after Russia's recent ban on U.S. chicken and the formation this week of a heavyweight agricultural union, of which Interros' Agros agricultural holding is a member.

"I wouldn't say that it is directly related to the recent events, but it is an advantageous moment for us," said Interros spokeswoman Nina Dementsova.

The sale also fits in with Interros' strategy over the past several months of selling off portfolio investments. Last year, Interros management announced plans to resolve all business conflicts. Since then, the holding sold its stake in Sidanco to oil major TNK's shareholders for more than $1 billion and sold off its stake in Svyazinvest after prolonged disputes with its partner in the Mustcom consortium, George Soros. It has also resolved its differences with the BP-led consortium at Rusia-Petroleum, after gaining seats on the board of directors. The remaining battlefield was NLMK.

Interros will use the proceeds from the sale to develop both new and existing projects, Dementsova said. "Money should work," she said, adding that Agros, as one of Interros' most important projects, is likely to benefit.

"It would be logical for Interros to invest more in agriculture and sell down steel now," Nikolayev said.