***MB SPECIAL REPORT — MISSION: CONTROL PART II

On July 1, ZAO Ilyich Stal will hold a meeting of its shareholders. The outcome of the meeting will be crucial for Ilyich Iron & Steel, one of Ukraine’s key industrial assets.


On July 1, ZAO Ilyich Stal will hold a meeting of its shareholders. The outcome of the meeting will be crucial for Ilyich Iron & Steel, one of Ukraine’s key industrial assets.

Over the past year a struggle has erupted for control of the steelmaker, which last year was the country’s third largest. On the one hand are a group of previously unknown investors. On the other is one of the country’s largest conglomerates, Metinvest Holding.

On April 30 last year four companies were confirmed as having bought a majority share in ZAO Ilyich Stal, the holding company which owns a 90.41% share in the Mariupol-based operation. The remaining share in the steelmaker is in free-float, analysts told MB.

According to Ukraine’s Securities and Stock Market State Commission (SSMSC), Formigos Holding bought a 25% share in the company, while Emorsa, Liberani Co and Rewein all took stakes of 24.999%. All three companies shared the same address in the Cypriot capital of Nicosia.

How these companies managed to acquire almost all of the shares in Ilyich Stal so quietly, for the moment, remains a mystery. But they didn’t hold onto them for long.

On June 30 three more companies were listed as the predominant shareholders in Ilyich Stal. Alkom and Depositary Bureau both claimed a 24% share in the holding company, while Kastodian took control of a 48% share.

These three companies are registered at different addresses in Ukraine, according to SSMSC’s website. Analysts believe they are proxy holding companies for the four Cypriot shareholders.

Chairman of the board Vladimir Boyko has challenged the move, dubbing the takeover a ‘corporate raid’, and has continued merger talks with Ukrainian raw materials and steelmaking group Metinvest, controlled by billionaire industrialist Rinat Akhmetov.


Akhmetov: in talks with Ilyich


“Talks are indeed taking place but I don’t know when they will be completed,” Boyko told MB, saying that the urgency of the negotiations has increased since last year’s share transactions were made public.

“When the raider attack started, [the negotiations] were speeded up,” he said.

The merger will give Ilyich access to Metinvest’s strong raw materials base — the company comprises 24 industrial companies in the mining and steelmaking industry in Ukraine, the USA, Italy and the UK.

Metinvest’s steelmaking assets produce welded pipe, carbon steel plate flat products and long products. Overall, they produced 7.03 million tonnes of crude steel in 2009, down from 8.24 million tonnes the year before. But the company was still Ukraine’s second largest steelmaker.

Its raw materials assets are even more significant. The company’s mines are able to produce 46.5 million tpy iron concentrate and pellets and a significant tonnage of metallurgical coking coal.

It also owns Prometey, a company it says is dealing with 160 firms collecting, processing and shipping ferrous scrap in Ukraine.

Metinvest will gain control of another steelmaking asset and a greater share of the Ukrainian flat products and tube and pipe markets if the deal is completed.

“In the long run this is a good investment for Metinvest,” a source with in-depth knowledge of the two companies told MB. “Ilyich is an old Russian Combinat with tens of thousands of workers and interests in various sectors, including the agricultural industry.”

The company has 12 sintering machines, five blast furnaces, three oxygen converters and an open hearth furnace. It was the world’s 66th largest steelmaker in 2009.

“Akhmetov will transform it into a capitalistic company,” he said.

This makes sense. There are potential synergies with Metinvest’s Azovstal plant, which is situated nearby, and the steelmaking and mining group already supplies Ilyich with many of its raw materials, analysts told MB.

“It will strengthen [Metinvest’s] product range,” said one.

This isn’t the first Ukrainian steelmaking asset Metinvest has looked at. A spokesman for the group confirmed it had conducted due diligence on 3.5 million tpy flat products mill Zaporizhstal, then owned by Toronto-based Midland Group.

The deal went no further, however, and Zaporizhstal was snapped up by another group of investors. Midland Group was unavailable for comment, but analysts said the deal was completed for $1.7 billion.

Akhmetov’s holding company System Capital Management, which holds a 75% share in Metinvest, has made a point of clearly distancing itself from the fallout of this deal, denying persistent rumours that it is involved in litigation as a result of this deal.

His focus, it appears, is now on Ilyich.

But, with another group of investors having such a strong hold on Ilyich’s shares, Metinvest will presumably have a fight on its hands to make this kind of deal work.

The group has allies on Ilyich’s board — most notably Boyko. At the meeting on July 1 they plan to act.

According to a source at Ilyich, the meeting will vote on whether to issue new shares — four times as many as are presently in circulation — and dilute the stake controlled by Kastodian, Depositary Bureau and Alkom.

There won’t be much in their way, Ilyich claims. These shareholders do not have representatives on Ilyich Stal’s board of directors, a spokesman told MB, and therefore will be unable to oppose the plan.

Whether this is the case or not seems to be a legal grey area at the moment.

Following a hearing late last year, a court in Kherson, Ukraine ruled that the shareholders were legally entitled to appoint representatives to Ilyich Stal’s board.

But a Mariupol Court subsequently ruled the opposite, saying the three companies did not have the right to elect directors to the board.
Which court has jurisdiction remains to be seen.

To read Mission: control part I click here

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