Deripaska’s Plan Brings Board Conflict, Loss for Li Ka-Shing

Deripaska Plan Brings Management Conflict
A newly-moulded aluminum block displays a United Co. Rusal logo at the company's Khakassia factory in Sayanogorsk, Russia. Photographer: Andrey Rudakov/Bloomberg

United Co. Rusal’s Oleg Deripaska is wedded to an investment that barely covers borrowing costs, has brought management into conflict and added to losses for stockholders such as billionaire Li Ka-shing and Paulson & Co.

Deripaska, whose company today chose a new chairman after a boardroom clash, has snubbed offers of as much as $18 billion for Rusal’s 25 percent stake in OAO GMK Norilsk Nickel that could cut Rusal’s debt and restart the payment of dividends. For the founder of the world’s biggest aluminum maker such rewards take second place to the goal of creating a diversified mining company to rival Australia’s BHP Billiton Ltd.

“The key issue seems to be the tight grip that Deripaska holds over the strategy and operations of the company,” said Mikhail Stiskin, head of metals research at Troika Dialog, the oldest Russian investment bank. Victor Vekselberg, who quit as chairman this week, is among shareholders who are “mainly interested in the immediate cash returned from the business,” he said.

The annual dividend of about $290 million Rusal gets from Norilsk is eaten up by about $230 million in repayments on the loan used to buy the stake, Bloomberg calculations show. Rusal pays about 4.5 percentage points above the London interbank offered rate.

Boardroom discord over strategy also eroded Rusal’s market value. The shares fell 13 percent in the four days after Vekselberg quit on March 12 saying management had driven the company into “deep crisis.” Rusal, owned 47.7 percent by Deripaska’s En+ Group, said it had already planned to consider replacing him.

Barry Cheung

Rusal dropped 0.5 percent to HK$5.65 by the close of trading in Hong Kong today. Its Moscow-traded depositary receipts gained 3.5 percent to 224.70 rubles at 4:38 p.m. local time. Deripaska sold the stock for HK$10.80 each in a January 2010 initial public offering, the first by a Russian company in Hong Kong.

Rusal said today it elected Barry Cheung, chairman of the Hong Kong Mercantile Exchange, to replace Vekselberg. A “comprehensive review” of corporate governance is an “immediate priority,” and additional independent directors will be appointed so that they comprise a third of the board, Cheung said in a statement.

The slump in the stock since the IPO has wiped $5 billion off the value of shares held by investors other than Deripaska. Li, Hong Kong’s richest man, the fund of U.S. money manager John Paulson, Shangri-La owner Robert Kuok and mining investor Nathaniel Rothschild were Rusal cornerstone investors at the time of the IPO. They haven’t sold the stock since, Rusal First Deputy Chief Executive Officer Vladislav Soloviev said Nov. 14.

No Dividends

The loss in value is compounded by the absence of a dividend, including from the 2011 earnings Rusal will release on March 19.

“It all depends on what type of investor you are,” said Helen Lau, an analyst at UOB-Hay Hian Ltd. “From the CEO’s point of view we should have a long vision. Diversifying into other metals makes sense to even out your earnings volatility.”

As a Norilsk shareholder, Rusal can use the nickel and copper producer’s dividends to bolster cash flow, Lau said. “The chairman said that the company’s in a deep crisis but we’ve seen that it’s improving.”

Hong Kong-listed Aluminum Corp. of China Ltd. has slumped 51 percent since Rusal’s IPO and many Chinese aluminum makers are now looking for assets outside their main metal, Lau said. Meanwhile, Rusal’s valuation has benefited from a 28 percent, or $3 billion, gain in the value of its Norilsk stake during the same period. Norilsk is the world’s biggest nickel miner.

‘Strong Conviction’

Still, for many investors stable dividends are important and concern about Rusal’s boardroom conflict will outweigh any improvements the company is showing financially, Lau said.

“As a minority shareholder I’d be very concerned,” Lau said. “Unless I have a strong conviction in this company, I’d sell. I don’t want to take the risk” of siding with any of the conflicting parties inside Rusal, she said.

Rusal is rated a buy by 19 analysts, a hold by 7 and a sell by 2, according to data compiled by Bloomberg.

Deripaska’s plan for Norilsk, the largest Russian mining company and producer of half the world’s palladium, began with his purchase of the 25 percent stake in March 2008. The deal, which doubled Rusal’s debt to almost $17 billion months before the global financial crisis cut metal demand and prices, was touted by the aluminum company as the first step in a merger.

While Rusal’s IPO helped cut its debt burden, Deripaska’s ambitions for Norilsk have been stymied by a feud with rival shareholder Vladimir Potanin and his allies on the board.

This leaves shareholders asking if they can afford to wait for the founder’s plans to pan out, according to Ben Collett, Japanese equity chief in Hong Kong for Louis Capital Markets.

“This is more of an owner’s company than a shareholders’ company,” Collett said. “If the owner’s neglecting the short or medium-term interest of all shareholders to pursue a long-term strategy, then you have to sell the stock.”

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