MOSCOW Russian tycoon Suleiman Kerimov tightened his grip on the country's potash industry, outlining plans to combine Uralkali (URKA.MM) URKAq.L and Silvinit SILV.MM SILV.RTS and create the world industry No. 2.
The tie-up would be the first major consolidation in a booming sector and was boosted this week by news that Premier Vladimir Putin had been informed of it, meaning the deal has the blessing of Russia's most powerful leader.
The two companies have been tipped as merger partners since billionaire Kerimov and associates bought controlling stakes in both firms during the summer.
Kerimov personally owns 25 percent stakes in both firms but has control via the holdings of business partners. He secured political thrust for his strategy in August when he hired former Kremlin chief of staff Alexander Voloshin to chair Uralkali.
Investors believe Kerimov's plan is to sell on his holdings in the combined group at a profit.
"I look at Kerimov as a financial investor, so we can expect some kind of sale later on," said Marina Shestakova, Deputy Chief Investment Officer at Wermuth Asset Management.
"Uralkali shares are not cheap but the deal could be good for minority shareholders. If someone comes in to buy Kerimov's stake they would also make an offer to minority shareholders."
Uralkali shares slipped nearly 2 percent on Friday having jumped nearly 5 percent in the previous session on the Putin news. Silvinit shares rose 4.7 percent to 29000 roubles. The moves reflected adjustments for the higher enterprise value to EBITDA of Uralkali.
Between them, Uralkali and Silvinit produce 11 million tones a year of potash -- a key ingredient of mineral fertilizer -- rivaling Canadian industry leader Potash Corp (POT.TO) on 12 million tones.
Based on Reuters data and closing share prices on Thursday, the pairing has a combined market value of about $23 billion, making it the third largest fertilizer company by that measure behind Canada's Potash and Mosaic Co (MOS.N).
Analysts said the tie-up would be a major step toward consolidation of the industry dominated by producers in Canada, Russia and Belarus.
"A merger would increase the power of the combined company as it could ask clients for higher prices. Potash Corp could also ask for higher prices. This consolidation will affect the industry on a global level," said Georgy Ivanin at Alfa-Bank.
A tie-up would yield some savings, said Deutsche Bank's Bob Kommers: "There will be some operational synergies, particularly on transport, although I think less than 10 percent of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA."
Uralkali said it had yet to agree the terms of any deal, which would be structured as a reverse takeover by Silvinit where Silvinit would issue the new shares and Uralkali shareholders would be end up with the bulk of the share capital -- in line with their respective market caps.
He said Uralkali traded at 17 times enterprise value to EBITDA, against 12 times for Potash Corp and 11 for Silvinit.
Potash took center stage on global markets earlier in the year when Australian mining giant BHP Billiton (BHP.AX) launched a hostile $39 billion bid for Potash Corp -- a move eventually repelled by Canadian authorities.
Bank of America Merrill Lynch said it was hiking its prices on Russian fertilizer groups due to a predicted run on soft commodity prices. "(We) believe strong crop prices will continue to drive demand for fertilizers," it said in a note.
Russian newspapers said on Friday the boards of Uralkali and Silvinit will discuss the merger on Monday.
Sources close to Silvinit told the Vedomosti business daily the company's board members had yet to receive the proposed share swap ratios, while Kommersant also said the merger can be technically completed by the middle of 2011.
Kommersant said VTB, Goldman Sachs and Credit Suisse are advising the companies on the deal.
(Additional reporting by Maria Kiselyova; Editing by Mike Nesbit and Andrew Callus)