MMK Names Severstal as Top Merger Pick Years After Talks Failed

  • MMK says merger analysis was hypothetical, no talks planned
  • Company seen as target given succession issues: Deutsche Bank

Magnitogorsk Iron & Steel Works OJSC gave a presentation this week showing that among Russia’s top steelmakers, a merger with Severstal PJSC would be most profitable.

While the company said the analysis is hypothetical and no deal talks are planned with anyone, there is a history between the two companies. In 2014, MMK owner Victor Rashnikov and Severstal’s Alexey Mordashov were close to reaching an agreement, according to three people familiar with matter, who asked to not be identified because the discussions were private.

The talks fell apart after Rashnikov, who is 67 and owns almost 90 percent of MMK, decided he wasn’t ready, the people said. He’s worked at MMK for almost five decades and was among its top executives during the Soviet Union.

Severstal would still be interested in considering a possible deal, two people of the people said. Severstal’s and MMK’s press services declined to comment.

Steel Deals

Russian steel is dominated by a handful of companies and there hasn’t been a big domestic merger in more than a decade. If Severstal and MMK combine, it would create the top steelmaker in Russia and one of the largest in the world, with capacity of more than 20 million tons of finished products, according to a report from Denis Gabrielik, an analyst at Otkritie Capital International.

“MMK may get along without any mergers as it’s a self-sustaining business, but it is potentially seen as a merger target, given succession issues," George Buzhenitsa, an analyst with Deutsche Bank AG, said by phone. "A deal may happen one day, and it will make sense, given scope for stronger supply discipline in the domestic market.”

It would make sense for MMK to merge with a company that produces raw materials rather than another steelmaker, he said.

‘Well Positioned’

A possible merger between Severstal and MMK would deliver up to $700 million in additional earnings before interest, taxes, depreciation and amortization, the company said in a report titled "MMK is well positioned for local consolidation."

That compares with a maximum of $500 million for a merger with NLMK PJSC. An MMK deal with Evraz Plc would generate up to $300 million, the company said.

In the 2014 talks, the companies discussed Mordashov and Rashnikov sharing voting power, but Rashnikov would only own about 30 percent of the combined company, people said. Some of MMK’s managers would also get key posts in the new group, the people said.

In February, Mordashov highlighted the possibility for more consolidation in the industry in an interview with Bloomberg News.

“It could help to cut the costs, but no practical steps in this direction have been taken yet," he said at the time.

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