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. Last Updated: 07/27/2016

Norilsk Stake Goes to RusAl

Oleg Deripaska's United Company RusAl on Friday won its battle to grab a 25 percent blocking stake in Norilsk Nickel, the first step toward acquiring control of the company.

A full takeover by RusAl of Norilsk would create a $100 billion metals giant to rival the world's biggest, but analysts raised concerns that minority shareholders in Norilsk would emerge as the biggest losers in such a tie-up.

Vladimir Potanin's Interros Group, which owns a 25 percent stake in Norilsk, waived its right to buy the stake Friday from Mikhail Prokhorov's Onexim Group, hours before a deadline expired, claiming that the $15.7 billion asking price was too expensive.

RusAl, which had a deal to buy the stake if the Interros offer failed, said in a statement that it was moving ahead with the deal and expected to close the transaction in the first quarter of 2008. RusAl said the deal would have to clear anti-monopoly hurdles in seven countries, including Russia.

"We intend to create Russia's first global diversified metals and mining company," RusAl chief executive Alexander Bulygin said in the statement. "Our company will join the ranks of the world's top five mining giants."

Prokhorov is to receive an 11 percent stake in the enlarged RusAl and an undisclosed amount in cash for his share, for which RusAl said it had received guarantees from ABN Amro, BNP Paribas, Credit Suisse and Merrill Lynch. Prokhorov will also gain board representation.

Kommersant said earlier this month that the deal with RusAl was worth $12.7 billion, $3 billion less than the terms offered to Potanin. The deal gives RusAl an implied value of $45 billion and Norilsk a value of $55 billion, according to media reports.

Until their breakup, Potanin and Prokhorov were one of the country's most successful and established business partnerships. The relationship appeared to turn sour after Prokhorov was arrested in January at a French ski resort in an investigation into a prostitution ring. Since then, the two men have wrangled very publicly over how to split their assets, the most valuable of which is Norilsk.

Potanin had originally been expected to walk away with a controlling stake in Norilsk. That deal was scuppered last month, when Prokhorov sent Potanin a nonnegotiable offer widely seen as overvaluing the company.

Potanin approached several lenders but was understood to have received guarantees only from domestic banks. Analysts have attributed the lack of interest to a lukewarm lending environment and to uncertainty over whether a deal with Potanin would have Kremlin support.

RusAl has strongly hinted that it would seek to take control of Norilsk and merge the two to create a $100 billion company capable of challenging the likes of global giants BHP Billiton and Rio Tinto.

Analysts said the deal made strategic sense, given RusAl's strong organic profile and Norilsk's good cash position. A diversified miner would put it higher on the radar of international investors.

A spokeswoman for Interros said Potanin had no plans to sell his 25 percent stake. He owns a further 4 percent via holding company KM Invest.

Alexander Yakubov, metals analyst at Trust investment bank, said a takeover bid by Deripaska might face resistance from Potanin. "Norilsk is Potanin's baby," he said. "Psychologically, it is difficult for him to sell. I don't think he will sell ... to Deripaska in the short term."

Deripaska could seek to buy shares from minority shareholders, but recent speculation has pushed Norilsk's price up to close to its fair value, Yakubov said.

Minority shareholders could lose out if RusAl and Norilsk merge, as analysts consider RusAl to be artificially overvalued for the purposes of the Norilsk deal.

"If a merger happens, it will be on a stock for stock basis -- not cash -- because RusAl would not be able to raise that much cash," said Vladimir Zhukov, a metals analyst at Lehman Brothers. Minorities may be forced to swap lower-valued Norilsk shares for expensive RusAl shares, he said.

Norilsk said in a statement Friday that it would make every effort to protect minority shareholders' rights in the transaction.

Analysts warned that the deal could face political resistance when RusAl seeks anti-monopoly approval -- if not at this stage, then later.

"If this transaction was being pushed by the Kremlin, then Potanin would get a deal with Deripaska," Zhukov said. "The reason why Potanin is objecting to this deal is because it is not being pushed by the Kremlin, which means eventually the Kremlin may block it."

The Kremlin might not support Deripaska, because it is feared that he is becoming too powerful, Kommersant said Friday.

Some analysts, however, said the Kremlin was supporting Deripaska's bid for RusAl with the aim of creating a national metals champion.

"For a long time investors assumed that the state was looking for the right mechanism to acquire a controlling stake, but as that has not been possible then the next-best alternative is to have it controlled by a business group that is almost a proxy for the state," said Chris Weafer, chief strategist at UralSib. "Deripaska, like [Roman] Abramovich, is in that category."

A deal with RusAl could bring to an end shareholder feuding that was starting to hurt the company, yet it remains to be seen whether Deripaska and Potanin will be able to work together, analysts said.

"They have no choice, they have to be good partners," said Trust's Yakubov. "Otherwise they would destroy the value of Norilsk."