Evraz, one of the biggest metallurgy and mining holdings in the world, has acquired significant assets in Ukraine. The Russia-based company, once run by the current head of Ukraine’s State Customs Commission Valeriy Khoroshkovskiy, made its first steps into Ukraine’s lucrative heavy industry market last week by closing a deal with Ukraine’s Privat group which was first announced several months ago. In doing so, the Russian company has not only secured a ready market for its ore but also prepared the ground for further expansion.
Premier league players
Evraz Group S.A. is partially owned by the man thought to be Russia’s richest oligarch, Roman Abramovich. Reuters notes that one of Privat’s owners, Ihor Kolomoyskiy is also now a significant shareholder thanks to this multi-faceted deal. On April 14 Evraz concluded the acquisition of 51.4% of the shares in Palmrose Limited, a Cyprus-based holding company and consequently, received a 99.25% stake in the Sukha Balka iron ore mining and processing complex, a 95.57% share holding in the Dnipropetrovsk Iron and Steel Works, shares in three Ukrainian coking plants - 93.74% of Bagliykoks, 98.65% of Dniprkoks and 93.83% of the shares of Dniprodzerzhinsk Coke Chemical Plant. “The next stage of the transaction, which requires issuance of new shares in Evraz, is subject to certain legal requirements in Luxembourg and is expected to be completed soon,” Evraz officials said in a statement.
According to Evraz company spokesmen, the firm paid USD 1 billion for its shares in Palmrose Limited and transferred the funds in December 2007. Earlier the company estimated the total cost of the assets at USD 2 billion to 2.2 billion, while the final price and the deal’s structure were to be ultimately determined by the group’s board of directors.
Abramovich replaces Kolomoyskiy
Before the deal was inked the Ukrainian assets in question belonged to Privat Group, which is part-owned by Ihor Kolomoyskiy, one of Ukraine’s biggest industrial tycoons, and his business partner Hennadiy Boholyubov, through affiliated structures such as Palmrose. In a rare interview Mr. Kolomoyskiy explained to the news website Ukrainska Pravda that a change in market players persuaded him to sell his steel, iron ore and coke assets. He stated that the enterprises were also interesting for Ukraine’s richest man and System Capital Management owner Rinat Akhmetov, but they failed to reach an agreement: “Akhmetov was not ready to pay cash for the whole sum. We aimed to sell our ore assets for USD 4 billion and the alternative of entering his company didn’t suit us. As a result we finally got USD 1 billion in cash from Evraz and the rest of the difference was paid in kind with shares which have already grown one and a half times in value,” Mr. Kolomoyskiy added.
Analysts say that rather than lump sums, the Ukrainian tycoon and his team are really more interested in the nearly 10% share in Evraz they have acquired as part of the deal, the price of which is currently growing faster than Ukrainian ore processing capacities. “It is a successful deal for Privat. It has no coal of its own to load its capacities while Evraz does. Evraz will have an additional impact from the synergy point of view because it will be able to export more coking coal for its three Ukrainian plants and will sell the coke produced by these plants in Ukraine,” explains Ivan Kharchuk, an analyst at the Kyiv-based investment bank Dragon Capital.
Capturing crucial capacity
While the Privat team appear pleased with this growth on paper, it is clear that Evraz Group has made huge gains in terms of its coal, iron and steel capabilities. According to company reports, Evraz produced a total of 16.4 million tonnes of crude steel in 2007. The Ukrainian assets acquired will now provide it with an additional 3.75 million tones of sintering ore per year from Sukha Balka, 1.8 million tonnes of cast iron and 1.23 million tonnes of steel per year from Dnipropetrovsk Works and 3.52 million tonnes of metallurgical coke per year from its Ukrainian by-product coke plants.
After the deal’s announcement in 2007 the ambassador of the Russian Federation to Ukraine Viktor Chernomyrdin predicted that this was only the beginning of a new wave of Russian acquisitions. “If they have made this step towards purchasing enterprises in Ukraine, in the future we can expect Russian industrialists to increase their presence on this market,” he said at a meeting of Russian investors in Ukraine in December 2007.
Consolidation battle begins
Dragon Capital’s Mr. Kharchuk confirms that with this acquisition deal Evraz has effectively “opened the door for M&A deals in Ukraine” and will intensify the competition among dominant domestic players such as System Capital Management’s Metinvest, Industrial Union of Donbass (ISD) and Arcelor Mittal. “Evraz will turn into a more active player on the Ukrainian markets for coal, coke, and iron-ore materials. They will also be in a very good position to acquire the Illich Plant [Mariupol Metallurgy Industrial Complex] and Zaporizhstal [Zaporizhskiy Metallurgy Industrial Complex]. With this acquisition deal they have laid a very good basis for their further expansion,” he concludes.
