What's a nice Russian oligarch like you doing in a steelworks like this?

Abramovich saved Chelsea but the intentions of two of his compatriots at the loss-making Corus aren't clear, write Tim Webb and Clayton Hirst

Sunday 21 March 2004 01:00

It has recently been the talk of the wine bars of Chelsea but surely not the pubs of Port Talbot: look out, the Russians are coming. The South Wales industrial town is home to one of the last remaining steel works in the UK. Part of Corus, it is now 14 per cent owned by Russian businessmen. Chelsea football club has feted owner Roman Abramovich as its saviour. Now Corus can name Alisher Usmanov and Oleg Deripaska as its own powerful Russian backers.

But you can forgive the Port Talbot workers for not getting decked out in furry Soviet style hats in their honour, as the regulars do at Chelsea's Stamford Bridge. They know little about Mr Usmanov, who owns 11 per cent. When their union, the ISTC, held an investor briefing in London last year, he sent his Iranian representative on his behalf.

No one knows exactly why the Russian businessmen are buying up shares in Corus. The company, which employs around 25,000 workers in the UK, loses even more money than a struggling football club. On Thursday, Corus announced £208m operating losses for the year.

Mr Usmanov, the company's second-largest shareholder, insists his intentions are honourable. But why is Corus jumping into bed with the Russians? And what does Mr Usmanov hope to gain from it?

Philippe Varin, the French chief executive of Corus who took over in May, is a realist. Since the old British Steel merged with Dutch firm Hoogovens to form Corus in 1999, the company has lost more than £2bn. The rationale behind the merger in 1999 was to achieve greater economies of scale, but the group is still dwarfed by its peers. Corus has a market capitalisation of £1.7bn; its nearest competitor in Europe, the Luxembourg-based Arcelor, is valued at €7.2bn (£4.9bn). In an industry where economies of scale matter and foreign competitors can undercut its higher labour and raw material costs, Mr Varin knows Corus cannot stand still and expect to survive.

Asked if the group will still be around in five years' time, he laughs, but admits: "It's a legitimate question. The consolidation process is going on in the steel business. The key is to restore profitability, but if there are opportunities, we have to look at them."

While it is still losing money, Corus is not in a position to be picky about its partners. Mr Usmanov owns stakes in three of Russia's largest mines, worth around £700m. He inherited them when they were spun off from the state-controlled gas giant Gazprom in one of the many murky Russian restructurings of the 1990s. He also now controls Gazprom's financial arm, Gazprominvestholding, which is said to be lucrative. One analyst says: "He is known as the hard man of Russia, the enforcer."

Since May, Mr Usmanov has been building up his Corus stake through Gallagher Holding, a Cyprus-registered holding company. His business associate, Mr Deripaska, had bought up to 3 per cent of the company, it emerged last week. Mr Deripaska is worth more than £1bn and controls Rusal, Russia's second-largest aluminium producer. He survived an assassination attempt during the so-called "aluminium wars" when the Russian metals industry was consolidated.

A former business partner of Mr Abramovich, he is a Chelsea fan and owns a house in London. But like Mr Usmanov, his intentions towards Corus are not entirely clear.

Mr Usmanov wants a seat on Corus's board which, according to Eugene Morozov, his investment adviser, would allow him to "better understand Corus and provide him with more timely information on the company's strategy". Sources close to Mr Usmanov say he is aiming to get on the board at the annual shareholder meeting next month.

But Mr Morozov insists: "He is not going to pressure the management and force his way on to the board. He will only join the board by accepting an invitation from Corus."

However, Russian analysts laugh at the suggestion that he would politely wait to be invited on to the board. Mr Usmanov did not get to where he is today by being polite, they say.

The two Russian businessmen claim that they are not acting together. David Geovanis, the managing director of Basic Element, Mr Deripaska's investment company, says: "We have no agreement and we are not acting with Mr Usmanov."

And Mr Morozov states: "Mr Usmanov is aware that Mr Deripaska has purchased a certain stake, but this was not done in a co-ordinated way."

Yet the two, while by no means friends, are business associates who have made their millions in the murky world of the Russian metals industry. Both own large stakes in Nosta Steel. Tellingly, Mr Deripaska says he would back Mr Usmanov's move for a seat on the board. "We would support him. Mr Usmanov is a successful investor in the metals industry," says Mr Geovanis.

There is a business case for their interest. The Corus share price closed on Friday at 38.25p, compared with about 17p when Mr Usmanov first began building his position. But unlike Mr Deripaska, he would find it difficult to sell such a large stake without causing a share price rout. This suggests Mr Usmanov is in for the long haul.

One incentive is that Nosta produces "slab steel", a raw material used by refined steel makers such as Corus. Mr Usmanov is keen for Corus to buy raw materials from Nosta. Mr Morozov says: "It is in Corus's interests to diversify its raw materials. If it looks to Russia then we will be happy to help."

Maksim Matveev, an analyst at Russia's Alfa Bank, says Mr Usmanov could be looking to invest outside Russia before President Vladimir Putin begins an expected clampdown on the widespread use of offshore companies by the metals industry to avoid tax. Stephen O'Sullivan, the head of equities at Russian brokerage UFG, agrees, but says a full-scale takeover bid for Corus is unlikely. "There has been a recent trend of Russian businessmen diversifying out of Russia. But if you are a well-connected oligarch, you can enjoy much higher rates of return than in the UK. I expect that Mr Usmanov and Mr Deripaska are diversifying their assets rather than exiting Russia altogether by preparing a takeover bid for Corus."

Either way, Mr Varin is determined to press on with Corus's recovery plan. He aims to make a £600m profit by 2006. The European aluminium business, worth around £450m, is up for sale again, and the proceeds are vital to pay off debts of £1bn. Mr Varin's predecessor, Tony Pedder, resigned last year after a proposed sale of the business to French rival Pechiney was blocked by the Dutch supervisory board. This time, the signs are good that the Dutch will give their assent to the sale. Private equity groups CVC and Blackstone are interested in the business and are looking at creating a new European metals company by combining it with rolling mills in France and Germany that are being sold this year by Canadian metals giant Alcan.

Corus has also been helped by the recent rise in steel prices on the back of huge demand in China and a shortage of alternative producers. Philip Tomlinson, the head of steel at consultancy CRU, says: "Optimists in the industry reckon high prices will last up to six years." And if the optimists are wrong, there are always the Russians.

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