Oleg Deripaska, Russian tycoon and buddy of President Vladimir Putin, is one lucky man. Why, just the other morning, he opened some Froot Loops, shook the box a bit, and out came the keys to Russneft, one of the largest oil producers in the country - just like that.
So it goes in the charmed life of Mr. Deripaska, who in five years has vaulted from virtual unknown to the world's 40th richest man. He's worth $13.3-billion (U.S.) in the estimation of Forbes, far more than Rupert Murdoch or Jimmy Pattison or Michael Bloomberg or Richard Branson - you know, people who've been at it for most of their lives. At 39, Mr. Deripaska is the third-youngest person on Earth to have accumulated more than $10-billion in personal wealth; the two younger ones invented Google.
Mr. Deripaska, as far as anyone can tell, has invented little other than new and creative ways to get his fingers on vast old-economy assets in Russia. All of which leaves Magna International investors with a dilemma.
Mr. Deripaska wishes to have a significant stake in the auto parts company. Frank Stronach, Magna's founder, wishes to sell it to him and is promising shareholders untold riches making transmissions for Ladas. Investors have to make up their minds by Aug. 28 whether they'll let the deal proceed. The shareholder vote is really a referendum on one question: Are the rewards of Russia large enough to make up for the risk and the odious governance aspects of the deal?
More Report on Business Stories
Two facts are not in dispute. The first is that Russia's car market has enough potential to excite anyone in the bumper-bashing business. Auto sales grew 20 per cent last year, and while the numbers are still small, there's oodles of room for growth: there are only 177 vehicles in Russia per 1,000 people. (In Canada, the figure is more than 550 vehicles per 1,000.)
The second is that Magna could do worse than to hitch its star to Mr. Deripaska, whose ties to Mr. Putin have allowed him to build, in short order, an impressive conglomerate in mining, timber, banking, insurance, aluminum, oil, and construction. Oh, and don't forget car manufacturing: Group Gaz has a 16-per-cent share of the Russian automotive market. For Magna, that's part of the attraction.
"It's going to accelerate our growth into Russia," says Vince Galifi, Magna's chief financial officer. "What we find as we move into new markets is we don't necessarily understand the culture. We don't necessarily understand all the rules. And we find the best way to mitigate risk is to have someone beside you."
Fair enough, but that's also the scary part, isn't it? The "culture" in Moscow these days seems to allow for the existence of two kinds of big companies: those in favour with the Kremlin, and those that get their kneecaps busted. So discovered Russneft's Mikhail Gutseriyev, who claimed that government authorities harassed him into coughing up his company. (Mr. Deripaska wants to buy it and will, some believe, flip it to a state oil concern). Mr. Gutseriyev recanted his story yesterday, mysteriously, but perhaps understandably. He's finding out what BP and others already know: In Putin's Russia, you own what you own until someone powerful decides he wants to make your life hell.
Mr. Stronach is not a rube in the rough-and-tumble ways of emerging markets. Magna has joint ventures in China and India, not exactly corruption-free zones. But Russia may be worse. Transparency International's corruption perception index ranks it 121st of 163 countries, tied with such capitalist bright lights as Rwanda and Honduras. (China and India are tied for 70th.) It's not a problem today because Mr. Deripaska is the Kremlin golden boy, but what about tomorrow?
All of this is not a reason for Magna to stay out of Russia. But shareholders need to look hard at the size of the benefits. We know why Mr. Stronach wants this deal: He stands to rake in an extra $7-million-plus (U.S.) because of the unusual dividend-sharing structure Mr. Deripaska agreed to, plus that $150-million payment for his "consulting" business. Five members of management, including Mr. Galifi, also stand to share more than $2.5-million in extra dividends. For them, it's a no-brainer.
For the rest? Let's do some simple math. Suppose Magna could put $750 worth of parts in a million Russian cars - about half the current size of the market. Then suppose it could earn a 5-per-cent margin on those sales.
That's $38-million, or about 6 per cent of Magna's average annual profit for the past three years. It's not exactly going to make minority investors rich, and having Mr. Deripaska hanging around adds the risk that the markets will place a Russian discount on Magna's stock.
Investors may find the nerve to say nyet.
20