Rusal's debut on the Hong Kong Stock Exchange was a business miracle, even though the fresh shares quickly wilted. Yes, Oleg Deripaska, owner and chief executive officer of Rusal, the world's largest aluminum company, was disappointed by the 10.6-per-cent fall yesterday. But give the man credit. The betting not long ago was that the Russian oligarch would be lucky to emerge from the financial crisis with ownership of his yacht's dinghy. "A year ago, he was dead," says one of Rusal's new investors.
Rusal's journey from debt-swamped victim of Mr. Deripaska's empire-building mania to the resident metals giant of the Hong Kong exchange is a remarkable turnaround story.
As late as the spring of 2008, Rusal was on a roll. Formed two years earlier by the merger of Rusal, rival Sual and the aluminum assets of Swiss commodities trader Glencore, the company had grand ambitions. In April of that year, at the very peak of the market, it bought 25 per cent of Russia's Norilsk, the planet's top nickel maker, for about $7-billion (U.S.). Rusal planned an initial public offering in London. It seemed that Russia's dream of creating a global commodities powerhouse was about to come true.
The financial crisis dashed that dream in a nanosecond. Rusal, laden with $16.8-billion of debt, almost half it owed to foreign banks, probably would have collapsed were it not for the Russian government. It rode to the rescue with an emergency $4.5-billion loan, made through Vnesheconombank (VEB), the state-owned development bank whose supervisory board chairman is Russian Prime Minister Vladimir Putin. The alternative - Rusal's seizure by foreign bankers - was unthinkable.
VEB's chequebook alone was not enough to save Rusal. By last fall, against all odds, Mr. Deripaska had negotiated a standstill agreement with the foreign banks and persuaded Rusal's second-biggest shareholder, the oligarch Mikhail Prokhorov, to convert his $2.8-billion Rusal claim to equity (he owns about 17 per cent of the post-IPO Rusal). Rusal's listing attempt was revived, this time in Hong Kong. The $2.1-billion raised from the IPO will be used to reduce debt.
Rusal is not yet in the clear, however. Yesterday's selloff showed that investors think the company deserves a lower-value multiple than its peers, such as Aluminum Corp. of China. But at least the potential for recovery is there. As the low-cost producer - ultracheap Siberian hydropower feeds its smelters - Rusal is highly leveraged to rising aluminum prices. Typically, every 1 per cent rise in gross domestic product translates into more than a 2-per-cent rise in aluminum growth.
Rusal's IPO gave it one thing it never had before - an acquisition currency. There is no doubt Mr. Deripaska wants to use it because he still covets a Rusal-Norilsk merger. Industry executives think a Rusal-Norilsk deal could come within a couple of years, assuming the aluminum and nickel markets don't blow up. This may be wishful thinking, if only because Rusal is restricted from making acquisitions (and paying dividends) for four years while it reduces debt.
That restriction is not the only obstacle. Mr. Deripaska's battle with former associate Michael Cherney threatens to mess up Rusal's ownership structure, making any deals unlikely unless the two men make peace.
Mr. Cherney, an Uzbekistan-born Israeli businessman who is on Interpol's fugitives list, claims he owns 13 per cent of Rusal. He has launched a lawsuit, to be heard in London's High Court later this year, in an effort to get it. Mr. Deripaska dismisses the claim as nonsense, but if Mr. Cherney were to win, paying him could trigger "adverse consequences" for Rusal, the IPO prospectus says.
Mr. Cherney has problems, too. He may be going up against the Russian state as well as the best lawyers Mr. Deripaska can buy. While Rusal is now a public company, it was rescued, and is partly owned, by a Russian state agency. The bailout means the government will have considerable influence over Rusal's direction.
In other words, if the state (read: Mr. Putin) sees merit in uniting Rusal and Norilsk to create a commodities champion, it will help Mr. Deripaska to achieve his goal, lawsuits or not. The risk for Mr. Deripaska is the loss of control of Rusal, a scenario the government may accept as long as most of the equity remains in Russian hands. Mr. Deripaska's 47-per-cent stake in Rusal would be severely diluted if the company were to issue shares to merge with Norilsk.
So far, Mr. Deripaska can count himself extremely lucky. Rusal has been saved and an IPO that looked impossible six months ago has been completed. If the Russian state continues to back him, Rusal, with Norilsk at its side, could emerge as a global commodities force. But if the state loses interest in him, all bets are off. This is the nature of business in a country where the line between industry and government is never clear.
