August 20, 2010 / 11:44 AM / 9 years ago

Scenarios: Russia's Kerimov creates national potash giant

MOSCOW (Reuters) - Russian billionaire Suleiman Kerimov is close to creating a national potash mining champion via the merger of his stakes in domestic rivals Uralkali and Silvinit.

The Kremlin-backed tycoon and trusted business associates have bought more than 50 percent of both companies.

A combined group would be the world’s second-biggest producer of potash including trading partner Belaruskali, with capacity of 13 million tonnes in 2012.

It would become the main rival to world leader Potash Corp of Canada — the subject of a $39 billion hostile takeover approach by global mining giant BHP Billiton.

BHP has rocketed the potash industry into the spotlight of global financial markets. The scarce commodity is a key component of fertilizer and its price is expected to soar as the world demands more food.

Below are some scenarios for Kerimov’s next move.

KERIMOV KICK-STARTS RUSSIAN MINING SUPER MERGER

The most dramatic possible outcome of Kerimov’s potash consolidation is the creation of a Russian mining super giant comprising several fertilizer groups and top mining groups Norilsk Nickel and UC RUSAL.

Kerimov could buy private fertilizer groups such as Belaruskali, Phosagro, Uralchem and Eurochem. Analysts and industry insiders say this would require several steps.

Belarussian President Alexander Lukashenko said this year he would consider a sale of a stake in Belaruskali, already Uralkali’s partner in the Belarussian Potash Co (BPC), so looking east to Belarus would be an obvious next move.

The deal however may be complicated by frosty political relations between Russia and Lukashenko, who has repeatedly angered the Kremlin this year. In June he ordered the suspension of Russian gas transit to Europe because of a pricing dispute.

An industry source said Russian firm Phosagro could also be the target, as its phosphate-based fertilizer is akin to potash.

Phosagro, Eurochem and Uralchem have all said they want to launch initial public offerings during the next five years — indicating their owners could be willing to sell.

“Such a merger makes a lot of sense...A national mining champion would provide significant operational synergies and would trade at higher multiples that its individual parts,” said Troika Dialog analyst Mikhail Stiskin.

KERIMOV COMPLETES INITIAL MERGER, TURNS QUICK PROFIT

Kerimov is a financial rather than industrial investor, and is expected to realize gains at some point — possibly after laying the groundwork for the national champion.

The date of a sale could be influenced by the fortuitous timing of BHP’s takeover approach for Potash Corp, which has sent the valuation of the entire sector through the roof.

“I don’t think he could have known (about the BHP approach), but Kerimov’s timing was perfect,” says Georgy Ivanin, senior analyst at Alfa-Bank.

Russia’s VTB bank has financed Kerimov’s purchase of the Silvinit stake for a six-month period, and this is considered a possible timeframe for an exit.

“We expect Kerimov to engineer a quick turnaround. Uralkali and Silvinit as a single company will improve efficiency. If he receives a good offer, why not?” said Marina Shestakova, deputy chief investment officer at Wermuth Asset Management in Moscow.

KERIMOV SELLS STAKE TO STATE OR FOREIGN PLAYER

The Russian government is expected to have the final say on when Kerimov can sell out and who the new owners will be.

Uralkali said on Thursday powerful Kremlin deal broker and recently departed Norilsk Chairman Alexander Voloshin would join its board.

“I think Kerimov is realizing a plan approved by people that will one day formally control the bigger company — most likely the Russian state, or (state-controlled) Russian Technologies,” says Alfa’s Ivanin.

Reuters reported last week that both Potash Corp and Australia’s Rio Tinto were eyeing stakes in Uralkali while Kerimov completes the merger with Silvinit.

Analysts think the Kremlin could approve such a deal if it were for a minor stake of 10-15 percent, but questions remain over whether Kerimov is in need of a minor foreign partner.

Eurochem, controlled by billionaire Andrei Melnichenko, is partnered with K+S via a 15 percent stake in the German group, and the industry source said Eurochem is more in need of foreign expertise as it is yet to start production.

“I don’t think Kerimov needs a foreign company — Uralkali is a market leader, it has expertise and know-how. It would not be in the best interests to bring in an investor,” the source said.

Reporting by John Bowker; Editing by Michael Shields

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