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. Last Updated: 07/27/2016

Deripaska to Pay $1.5Bln for Magna Stake

Combined Reports

A unit of Basic Element agreed Thursday to invest $1.54 billion in Canadian auto parts maker Magna International in a deal aimed at expansion in the fast-growing domestic car market.

The cash infusion could also help Magna fund a bid to buy struggling U.S. automaker Chrysler Group from its German corporate parent, DaimlerChrysler.

The complicated deal, which must be approved by shareholders and regulators, would give Basic Element chief Oleg Deripaska and Magna founder Frank Stronach joint control of the diversified auto supplier through a new holding company. Deripaska also owns Russia's No. 2 automaker, GAZ, through which Magna has a joint venture to produce car parts.

Magna chief executive Don Walker declined to discuss the company's pending bid for Chrysler but said GAZ could be part of expansion plans that could give Chrysler a low-cost manufacturing base and new sales opportunities.

"Any car company is looking at how they can expand market share and distribution, so that is something that would be discussed, I'm sure," he said during a conference call.

Stronach has said Magna has a partnership with Canadian buyout firm Onex aimed at buying a stake in Chrysler.

"This proposed alliance with Basic Element and its respected founder and chairman, Oleg Deripaska, is an exciting opportunity for Magna," Stronach said in the statement Thursday. "Our partnership will accelerate Magna's growth in Russia and surrounding countries, markets that we see as holding significant opportunities for us."

Basic Element said it was striving to become more competitive at home, and drew a parallel between the agreement and the company's recent multibillion-dollar deals to invest in foreign construction giants Strabag and Hochtief.

"All these projects are about bringing Western technology to Russia," company spokesman Konstantin Panin said.

The Magna agreement also could be a step toward Deripaska buying out No. 1 domestic carmaker AvtoVAZ, said Kirill Chuiko, an automotive industry analyst at UralSib.

He noted that Magna and AvtoVAZ had an existing arrangement to produce nozzles and that AvtoVAZ management has hinted that the company could be sold to Deripaska.

"This is also taking into account that Russian authorities are trying to consolidate all the machinery sectors," he said.

Chuiko said, however, that any takeover would not happen for at least another year.

Panin dismissed the suggestion that the Magna deal was linked to an AvtoVAZ takeover as speculation.

"We have had a very good relationship with Magna, and now we have a partner who will allow us to be more competitive in the future," Panin said.

Magna said it expected Russian auto production to grow by 50 percent over the four years ending in 2010 as GAZ and foreign car companies tool up to take advantage of rising incomes and relatively low vehicle-ownership rates.

Under the agreement, Russian Machines, a unit of Basic Element that is beneficially held by Deripaska, will buy 20 million newly issued Class A shares of Magna at a price of $76.83 per share.

A Canadian holding company will be created to combine the equity holdings in Magna of Stronach Trust, Russian Machines and certain members of Magna's executive management.

Russian Machines and Stronach would have the right to nominate six directors each to the new company, with the two chief executive officers of Magna also serving on the 14-member board, Magna said.

Panin said the exact percentage of shares that would go to Basic Element was yet to be decided. Analysts put the amount at 15 percent to 18 percent.

Russian Machines also agreed to invest $150 million in a separate firm affiliated with Stronach to collect half of the consulting fees Magna pays out to its founder.

Magna said it would continue to be a Canada-based company, with shares listed on the Toronto and New York stock exchanges.

Magna executives said the Russian investment deal could close in the third quarter of this year at a special meeting of shareholders.

Reuters, MT