Billionaire Mikhelson Becomes Russia’s Second-Richest Man

OAO Novatek CEO Leonid Mikhelson
OAO Novatek Chief Executive Officer Leonid Mikhelson is seen in his office in Moscow. Novatek, controlled by billionaires Leonid Mikhelson and Gennady Timchenko, is getting a boost after Prime Minister Vladimir Putin called for independent gas producers to grow. Photographer: Dmitry Beliakov/Bloomberg News

Leonid Mikhelson, the billionaire who controls OAO Novatek, Russia’s largest private gas producer, is poised to bump Alisher Usmanov from his perch as the country’s richest person.

Mikhelson has been closing the net-worth gap with Usmanov in the past three months, and is now $400 million behind the mining magnate, according to the Bloomberg Billionaires Index. The former engineer, who has a net worth of $16.8 billion, became the country’s second-richest man after buying a majority stake in a Russian chemical company for a fraction of its current value.

The 57-year-old paid less than $4 billion for a 57.5 percent stake in OAO Sibur Holding, eastern Europe’s largest petrochemical producer, in a series of transactions from December 2010 to the end of 2011, according to data compiled by Bloomberg. His stake is worth about $7 billion today, according to the index.

A decade ago, Moscow-based Sibur was a debt-laden unit of OAO Gazprom, the Russian gas exporter now half-owned by the state. Today, the closely held maker of more than 2,000 products, including gases and plastics, is preparing for an initial public offering that could add billions of dollars to Mikhelson’s fortune.

“Given the company’s monopolistic position in the Russian petrochemical industry and a planned production increase, I value Sibur at $12 billion,” Alexander Osin, chief economist at Moscow-based investment company Finam Management, said in an e-mail last week. “In the next five years, Sibur’s capitalization may double or triple.”

Staged Buying

Mikhelson is $1.8 billion ahead of Vladimir Lisin, Russia’s third-richest person. Lisin, who was the country’s wealthiest man in 2010, has seen his net worth sag after his publicly traded steelmaker OAO Novolipetsk Steel lost more than a quarter of its market value in the past year. The price for hot-rolled steel exported from Russia fell to its lowest level since 2010, according to Metal Bulletin.

Mikhelson acquired 25 percent of Sibur from Gazprom’s former lending arm, Gazprombank, in December 2010. He bought the shares through investment company ZAO Miracle, which was then a subsidiary of his Cyprus-based Dellawood Holdings Ltd.

Miracle paid $1.3 billion for the stake, according to Gazprombank’s 2010 financial report. Sibur’s total value at the time was 225 billion rubles ($7.3 billion), excluding debt, the bank said in a statement in December 2010. Within a year, Mikhelson had acquired the rest of Sibur and sold minority interests to fellow billionaire and Novatek shareholder Gennady Timchenko, and a group of Sibur executives.

Ownership Structure

According to an October 2011 Dellawood financial report, Mikhelson now owns 57.5 percent of the company. His estimated cost for the additional stake in the company is based on Gazprombank’s valuation reported in December 2010, according to the Bloomberg Billionaires Index.

The total price Mikhelson paid to Gazprombank wasn’t disclosed. Rashid Nureev, a spokesman at Sibur, declined to comment. Mikhelson declined to comment through a Novatek spokesman.

Timchenko now owns 37.5 percent of Sibur, and company managers Dmitry Konov, Mikhail Karisalov and Mikhail Mikhailov, and deputy board chairman Alexander Dyukov, split 5 percent, according to the Dellawood report.

The Sibur financial report also explained how the company itself had helped finance the transaction by lending Miracle 34 billion rubles in September and October of 2011. Miracle used the proceeds to repay outstanding bank loans. One month later, Sibur acquired the Dellawood subsidiary and assumed all of its debt, repaying it in December.

Dellawood has since been renamed Sibur Ltd.

Valuing Sibur

In 2011, Sibur generated $1.9 billion in net income on $7.7 billion in revenue, according to the company’s financial report. It also reported $2.7 billion in earnings before interest, tax, depreciation and amortization, and net debt of $2.1 billion.

Sibur is worth more than $12 billion, according to data compiled by Bloomberg. The valuation applied the company’s 2011 financial results to the average enterprise value-to-Ebitda, enterprise value-to-sales and price-to-earnings multiples of five publicly traded peers, OMV AG, Lanxess AG, LyondellBasell Industries NV, Saudi Basic Industries Corp. and Petronas Chemicals Group Bhd. A 13 percent liquidity discount and 2 percent country risk discount was applied, according to the Bloomberg Billionaires Index.

Finam Management’s Osin said the company’s profitability could slide if the Russian government decides to regulate the profit margins at the country’s monopoly businesses to support “weaker” industries, such as power generation and machinery.

Sibur is betting that demand for the company’s products will increase as developing economies grow. Next month, the company plans to start testing a facility that will produce 500,000 tons of polypropylene a year, with commercial output to start next year, Mikhelson said in June.

Building Novatek

“Sibur is a very good company, which managed to exit the crisis in a short period of time,” Mikhelson said in an interview with Bloomberg News at the World Economic Forum in Davos, Switzerland, in January 2011, while speaking about his interest in the petrochemical business. “I think Sibur has a very big potential for growth.”

Sibur may hold an IPO within 18 months to 3 years, Mikhelson told reporters in June 2011. While now isn’t a good time for the IPO, Sibur will be ready “to quickly list the shares should the situation change in spring,” Mikhelson said in June 2012.

Mikhelson got his start as an engineer. He sold his Lada car to buy a stake in a gas pipeline construction company when it was privatized after the fall of the Soviet Union. He later set up an oil and gas producer that he built into Novatek.

Sold Shares

In 2005, Novatek sold 19 percent of its shares on the London Stock Exchange, raising $966 million. Mikhelson sold a 7 percent stake in the company in the IPO, which earned him more than $350 million. A year later, Gazprom bought 19.4 percent of Novatek from Mikhelson and his partners for more than $2.3 billion. Today, Mikhelson owns more than 25 percent of Novatek, worth $8.9 billion.

Novatek’s market value has more than doubled since 2006. Shares of state-run Gazprom, Russia’s biggest company by market value, have dropped more than 50 percent in the same period, as the gas exporter suffered lower demand in Europe and invested in cost-intensive pipelines.

“I have focused on business over the last 10 years and tried not to spread myself too thin,” Mikhelson said in the 2011 interview with Bloomberg News. “Even after buying Sibur, there is normal management there. I will dedicate most of my time to Novatek.”

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