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. Last Updated: 07/27/2016

Report: Arms Trader Looks at Mechel Buy

For MTSergei Chemezov
A company affiliated with state arms trader Rosoboronexport is considering buying the assets of No. 5 steelmaker Mechel, Vedomosti reported Tuesday.

The assets would likely be bought through a holding company, RusSpetsStal, the paper cited a source close to Rosoboronexport as saying.

A spokesman for Rosoboronexport declined to comment on the report.

Mechel is more than 70 percent owned by CEO Igor Zyuzin. The firm's steel assets include its main factory in Chelyabinsk and the Izhstal factory in Udmurtia, which is close to many of the country's military plants. Mechel produced 5.95 million tons of steel in 2006, or 8.6 percent of the country's output.

A move on Mechel would likely signal that the arms trader, headed by Sergei Chemezov, a close ally of President Vladimir Putin's, is looking to build a national champion making steel used in industry, aerospace and the military.

Rosoboronexport has been on an acquisitions spree over the last year, gaining control of AvtoVAZ, the country's biggest carmaker, and VSMPO-Avisma, which produces one-third of the world's titanium and is an important supplier to aircraft makers Boeing and Airbus.

The acquisition last year by Roman Abramovich of 41 percent of Evraz, the country's largest steelmaker, prompted speculation that more consolidation in the industry would soon be under way.

Vladimir Zhukov, metals analyst at Alfa Bank, said he could see little "business logic" in Rosoboronexport buying Mechel's steel assets. It would distract the arms trader from its core businesses and not even be a cheap buy: Mechel, which is traded in New York, would cost about $2 billion, Zhukov said. For that money "would you buy something that you [didn't really] need?" he said.

MDM Bank said in a note Tuesday that a buyout might boost the shares of Mechel's Chelyabinsk steel plant, which is listed separately on the RTS.

Last year, Rosoboronexport set up RusSpetsStal with the aim of creating "a metallurgy holding via the consolidation and development of assets that produce weapons-grade steels and alloys."

On Jan. 30, the holding company bought the Volgograd-based Krasny Oktyabr factory, from Midland Steel Industries.

Krasny Oktyabr produces about 700,000 tons of steel worth some $500 million. It is one of the country's leading producers of special steel used in cars, aerospace and industry.

Troika Dialog brokerage helped close the Krasny Oktyabr deal and received a share in RusSpetsStal in exchange for financing the deal's registration and for subsequent investment, Kommersant reported Friday. Rosoboronexport owns 25.3 percent of RusSpetsStal through the company Promimpex, and has two out of five seats on the holding's board of directors, the newspaper said.

Troika Dialog did not return calls for comment about a possible Mechel deal.