China Wealth Fund Swaps Uralkali Bonds for 12.5% Stake

China took a 12.5 percent stake in OAO Uralkali, the world’s biggest producer of potash, giving the nation a bigger say in a global battle for market share and expanding the reach of its overseas agriculture investments.

Chengdong Investment Corp., a unit of sovereign wealth fund China Investment Corp., exchanged bonds for shares in the potash producer, Uralkali said yesterday in a statement. The Chinese fund purchased the bonds in November from billionaire Uralkali investors Suleiman Kerimov, Filaret Galchev and Anatoly Skurov.

China buys about a fifth of the $20 billion in global potash shipments to enhance crop yields in the world’s most populous nation. CIC is taking the stake in Uralkali as shareholders in pork producer Smithfield Foods Inc. yesterday approved the largest Chinese acquisition of a U.S. company.

“As economic development and urbanization continues, China’s demand for agricultural products will keep on growing,” said Ma Wenfeng, an analyst at Beijing Orient Agribusiness Consultant Ltd. “Agriculture and resources are relatively stable investments, but more importantly, it provides China with something that it needs in the long term.”

China Deals

China is scouring the world for farm and food assets as it seeks to bolster supplies needed to feed its people and to enhance domestic food security amid a series of food scandals. The nation has bid $10.3 billion this year on agricultural assets including chemicals and food, according to data compiled by Bloomberg.

Smithfield Foods shareholders voted to approve Shuanghui International Holdings Ltd.’s $4.7 billion deal, with 96 percent of voting holders yesterday approving the $34-a-share offer for the world’s largest hog and pork producer.

KSG Agro SA, a Ukrainian grain and sunflower seed producer, is working to sign an accord with China’s Xinjiang Production & Construction Corp. on irrigation, KSG said Sept. 23. The contract is for XPCC to install irrigation equipment on 3,000 hectares in Ukraine in 2014, KSG said by e-mail.

Under a 50-year plan, China will lease as much as three million hectares of farm land in the Ukraine, the South China Morning Post reported on Sept. 22. KSG has no intention to sell farm land to foreign companies, the company said in the e-mail.

Price Influence

Uralkali in July ended a potash marketing joint venture with Belarus’s Belaruskali that controlled about 40 percent of global exports, roiling the worldwide market for the soil nutrient. China’s influence over prices has increased since Uralkali quit the Belarusian Potash Co. venture, Danila Yakub, a UBS AG analyst, said in a report last week.

The lack of clarity over Uralkali’s future ownership and doubts that the BPC venture can be restored have strengthened the position of the biggest potash importer, UBS said.

China’s stake could theoretically give it added sway in contract negotiations, Kirill Chuyko, head of equity research at BCS Financial Group in Moscow, said by phone yesterday. “We don’t know if there are any additional terms in the agreement between China and Uralkali and its owners,” he said.

Uralkali said the transaction was agreed on by the Chinese fund and the potash producer’s shareholders. CIC’s press office declined to comment for this story.

“We don’t have information on whether CIC plans to get a seat on Uralkali’s board,” Alexander Babinsky, a spokesman for Berezniki, Russia-based Uralkali, said by e-mail. “We plan to ask our new shareholder very soon about its plans.”

Billionaires’ Stake

Kerimov, Galchev and Skurov, whose Wadge Holdings Ltd. sold the bonds to the Chinese fund, retain a combined 33 percent stake in Uralkali. They are said to have received offers to sell out of the Russian company after it quit the venture with Belarus and its Chief Executive Officer Vladislav Baumgertner was arrested in Minsk in August. Baumgertner continues to be held in a Belarus KGB prison, charged with abuse of office as chairman of the trading joint venture, Belarusian Potash Co.

CIC’s stake would rise to about 14 percent once Uralkali fulfills a pledge to cancel about 12.4 percent of its shares held as treasury stock following a buyback program. Uralkali said on Sept. 10 it will seek to cancel the stock in the first half of 2014. The billionaires’ combined stake will rise to about 38 percent.

“China considers potash to be a strategically important ingredient,” BCS’s Chuyko said. “It was clear that CIC would exchange its bonds for Uralkali shares as it didn’t seek to earn a return from this investment merely as a lender.”

Potash Competition

Uralkali competes for exports with Canpotex Ltd., which represents North American producers Potash Corp. of Saskatchewan Inc., Mosaic Co. and Agrium Inc.

China’s stake in Uralkali is a “non-event,” Wayne Brownlee, chief financial officer at Potash Corp., North America’s largest fertilizer producer, said yesterday. Brownlee said the industry still has significant barriers to entry and he doesn’t see Uralkali giving China special pricing.

Uralkali advanced in Moscow trading yesterday after the first report that the CIC unit had exchanged its bonds for shares. The shares gained as much as 3.9 percent and closed up 0.5 percent at 171 rubles in Moscow.

CIC, created to manage part of China’s $3.5 trillion of foreign-currency reserves, reported a 10.6 percent return on its overseas investments last year as global equities rallied.

Net income at the $575 billion sovereign wealth fund, which also holds the government’s stakes in China’s biggest banks, rose to $77.4 billion from $48.4 billion in 2011, Beijing-based CIC said in its annual report in July. Its overseas investment returns compared with a 4.3 percent loss in 2011 amid declines in global commodity prices.

Putin Ally

Vladimir Kogan, an ally of President Vladimir Putin, is a leading bidder for Uralkali, people familiar with the situation said on Sept. 13. Kogan is seeking to raise $9 billion to enable him to purchase a stake large enough to gain operational control, the people said. Kogan used to own a bank in Putin’s hometown of St. Petersburg. Other bidders include billionaires Mikhail Gutseriev and Vladimir Evtushenkov, Forbes Russia reported this month, citing people it didn’t identify.

Uralkali CEO Baumgertner, arrested Aug. 26, probably will be handed over to Russia soon, Kremlin foreign-policy aide Yuri Ushakov said Sept. 20. Putin and Belarusian President Aleksandr Lukashenko “briefly” discussed Uralkali yesterday when they met in Sochi, Kremlin spokesman Dmitry Peskov said.

There has been no change yet in Baumgertner’s status, RIA Novosti reported yesterday, citing an unidentified official in the Belarusian Prosecutor General’s Office.

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