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. Last Updated: 07/27/2016

Severstal Set to Sink $580M Into Italy

APForeign ministers Sergei Lavrov and Gianfranco Fini in a Moscow museum Monday.
Severstal is poised to snatch up a controlling stake in Italian steelmaker Lucchini for as much as half a billion dollars, potentially the largest Russian investment in the European Union to date.

Russia's No. 3 steelmaker is buying up at least 60 percent of mid-size Lucchini for as much as 450 million euros ($576 million), Italian newspapers and sources close to the deal said Tuesday.

The sources said an announcement would likely come Tuesday night or Wednesday, though by press time there was no official confirmation from the companies.

Severstal, which is actively seeking foreign acquisitions and has shown interest in Lucchini for months, bought U.S. steelmaker Rouge Industries for $285 million in January 2004.

Reports of the Lucchini deal came only a day after Italian Foreign Minister Gianfranco Fini visited Moscow in a bid to improve bilateral economic ties.

Italy has already become Russia's No. 2 trade partner. The volume of bilateral trade totaled $18.8 billion last year, or 23 percent more than in 2003, the Italian embassy said.

Italian newspapers Corriere della Sera and Il Sole 24 Ore said Tuesday that Severstal has agreed to purchase between 60 percent and 70 percent in Lucchini for 450 million euros.

Meanwhile, the chairman of Italian oil giant Eni told Corriere that his company is looking for new partnerships in Russia, though the auction of Yukos key asset Yuganskneftegaz would have been too risky.

Severstal's interest in Lucchini underscores the overpowering logic behind Europe's hunger for resources and Russia's vast natural wealth.

Severstal's strategy has been to produce steel cheaply in Russia but acquire rolling facilities close to consumers, said Timothy McCutcheon, metals analyst at Aton.

"The main thing is, Italy has no resources," McCutcheon said.

"There's a natural synergy here between a large domestic consumption market -- the EU -- and Russian supplies being fed into that demand source."

The move also projects Severstal as a formidable player in the world steel market, McCutcheon said, similar to oil major LUKoil.

"Severstal, by making the Lucchini purchase, is the LUKoil of steel -- it's the national champion," McCutcheon said. "With this acquisition, Severstal is a major global force in the steel industry."

Severstal will acquire the controlling stake of Lucchini after a new share issuance, Corriere reported, without saying where it got its information. The Lucchini family will pay 20 million euros for new shares and hold on to 30 percent of the company, the paper said, and Giuseppe Lucchini, son of the company's founder, Luigi Lucchini, will become chairman.

Minority shareholders in Lucchini will include Italian banks Capitalia, Mediobanca and Banca Monte dei Paschi di Siena, Corriere said.

Severstal finished 2004 flush with about $1 billion in cash, McCutcheon said, thanks to high international steel prices.

Should the transaction go ahead, the deal would fit exactly into the Italian government's priority of building bilateral trade on the back of close political ties.

"We have, nowadays, the best political relations between Italy and Russia ever," said Simon Carta, first commercial secretary at the embassy.

"Not only because of the friendship between the head of our government and the Russian president, but at every level."

Over the years, President Vladimir Putin and Italian Prime Minister Silvio Berlusconi have developed a warm personal relationship.

This year Rome is allocating an additional 20 million euros toward promoting bilateral trade, the embassy said.

Energy is Russia's No. 1 export to Italy, followed by metals, according to the embassy.

Oil, gas and metals make up nearly 90 percent of Russian exports to the country.

Russian exports to Italy are double the value of Italian imports, which are primarily industrial machinery, textiles and furniture.

Carta said the Italian government will be pushing Russia to create special investment zones in cities like Moscow and St. Petersburg with bureaucratic, tax and customs provisions for foreign companies.

Italy would also like to see such zones created in places where Italian firms have already invested, like Lipetsk and Yekaterinburg.

The Italian firm Merloni produces 37 percent of Russia's refrigerators from its factory in Lipetsk, and Duferco paid $60 million for a Russian steel mill with a 150,000-ton capacity in Yekaterinburg.