Russian Business Tries US Autombiles : Oleg Deripaka's Venture

Last week's buyout attempts in Canada by Norilsk Nickel have not had the chance to cool down, when another Russian conglomerate Basic Element (BasEl), owned by number two Russian oligarch Oleg Deripaska, has announced its decision to take a stake in Canadian Magna International. Magna International is an automobile parts maker, but what makes this deal interesting, are Magna's plans for the future. It is considered to be the principal bidder for Chrysler, which is in the process of being spun-off by parent company Daimler-Chrysler, after having a disappointing past three years. Chrysler already accounts for 12% of Magna's sales, and a tie-up of the companies in the future would make great sense from the point of synergies. Similarly, other companies in the running for Chrysler include buyout funs such as Cerberus Capital Management, Kirk Kerkorian, and a combination of Blackstone and Centerbridge Capital.

Although the deal is valued at just $1.54 billion, it is set to give Mr. Deripaska the right to nominate six out of fourteen members on the company's 14-member board, as much as the Stronach family that controls the company. The reasons behind Mr. Deripaska's interest in Magna lies in BasEl's ownership of OAO GAZ, one of the leading Russian automobile manufacturers, and probably the most prospective one. The Wall Street Journal writes that:

Siegfried Wolf, Magna's co-chief executive, who has worked in Russia, said he was able to see how Mr. Deripaska worked with his employees, which was a huge motivating factor in the deal. Mr. Wolf said he then asked Mr. Stronach about his thoughts on Mr. Deripaska and his potential for becoming Magna's partner. The two sides began talks in November 2006.

Mr. Stronach said he spoke to a lot of European companies Mr. Deripaska worked with and they had "the highest regard for him as a businessman." He said Magna did research on who would be a credible partner, and who would be accepted by the international markets, and Mr. Deripaska fit that criteria.

Whether Magna's deal with Chrysler goes through or not, "Russian Machines would certainly have heavy involvement", the Financial Times cites Don Walker, Manga's co-CEO. Magna has serious plans for the Russian automobile market if a deal with Chrysler succeeds. The market is expected to grow by 50% by 2010, which is what Magna analysts have cited according to the New York Times. With Chrysler's principal automobile lines including minivans and the famous Jeep, synergies between GAZ and Chrysler could be created to offer a range of cheaper-Chrysler type cars offered in Russia, built in GAZ factories.

Although the executives at Magna have stated that Mr. Deripaska's acquisition will not have an effect on the negotiating of the deal to buy Chrysler, where Magna' partner is a Canadian buyout group Onex, BasEl's entry into North America and future involvement with Chrysler could alarm US regulators and investigators. Mr. Deripaska is rumored to have been heavily engaged in the aluminum wars in Russia's 1990-s where smelters were bought out in the country under rather violent circumstances. Although Mr. Deripaska's involvement in criminal activity was never proven in Russian court, the US State Department revoked Mr. Deripaska's multi-purpose entry visa into the US on the basis of his having connections to organized crime.

Similarly, Chrysler continued involvement in supplying the Pentagon with several types of vehicles, could potentially raise the issue of US national security as a pretext to remove either Mr. Deripaska or Magna from the bidding if there is opposition to the Chrysler buyout. Chrysler's status as a US household name could also make the regulators uneasy about seeing a Russian oligarch in de-facto co-onwership of the company; fears of US job cuts and export of production to Russia could also be hurdles.