OREANDA-NEWS. August 19, 2011. Norilsk Nickel (NR: USD 22.3/ADR; USD 230.5 [RUB6,521]/local share) announced on the Russian version of its website that in accordance with the decision made at its board meeting on 15 Aug, management has formulated an offer to UC Rusal, which will be reviewed by the board on 24 Aug.

- Management proposes asking UC Rusal’s investment arm to sell 28.6mn Norilsk shares (around 15% of shares outstanding) back to the company for USD 8.75bn (USD 306/share - USD 3.06/ADR; this implies a premium of 20% to Norilsk’s average share price for the last six months). If approved by the board, the offer would be valid until 5 Sep 2011. If the offer is accepted a shareholder agreement would be signed in relation to the remaining 10% stake still held by Rusal.

- This offer reflects a reduction of about 9% from the USD 335/share offered to Rusal on 11 Feb 2011 (Norilsk offered to buy back a 20% stake for USD 12.8bn). Prior to that, two other offers had been made: USD 12bn for a 25% stake (made by Norilsk on 16 Dec 2010) and USD 9bn for 25% (made by Interros in Oct 2010).

- An offer price of USD 306/share implies a premium of around 33% to the current share price (USD 230/share).

- According to comments made by Norilsk management, if the latest buyback proposal is rejected by UC Rusal, a comparable offer will be extended to the company’s minority shareholders. Moreover, shares bought back from minorities could be cancelled, which would allow Interros, Norilsk’s biggest shareholder, to pass through an important 30% threshold and continue increasing its shareholding up to 50% without triggering a mandatory buyout offer to the remaining shareholders of Norilsk.

Bottom Line

This latest offer puts Rusal in a tricky position: on the one hand it would likely be reluctant to sell its 25% stake in Norilsk, which it considers a strategic investment. Moreover, the stake is currently used as loan collateral with Sberbank and Rusal is prohibited from disposing it. On the other hand, the company is facing a real danger that its main rival (Interros) could increase its share in Norilsk to 50%, which would give it (together with management) effective control over the board and the company. Therefore, there is a small chance that Rusal could agree to the offer while still maintaining a 10% stake in Norilsk (which could rise to around 12% if the buyback shares are cancelled) with its interests protected by a shareholder agreement.

However, we believe Rusal is likely to reject the offer, which could potentially give minority shareholders a chance to participate in a buyback on terms comparable to the latest proposed offer to UC Rusal.