Norilsk Nickel is left as winner in bid for LionOre

Norilsk Nickel is set to become the winner in the battle for Canadian mining group LionOre, after its rival bidder Xstrata said the price was too steep. As the Wall Street Journal reports in Tuesday's issue:

Xstrata PLC said it wouldn't exercise its right to match OAO Norilsk Nickel's 6.82 billion Canadian dollar (US$6.43 billion) takeover bid for Canadian gold and nickel producer LionOre Mining International Ltd. Norilsk, a Russian nickel and palladium producer, unveiled its enhanced bid last week, which topped Xstrata's latest offer of C$6.2 billion. LionOre found Norilsk's offer superior to Xstrata's. Under a support agreement, LionOre must pay Anglo-Swiss mining company Xstrata a C$305 million breakup fee if it takes an outside bid.

Norilsk Nickel, the world’s largest nickel miner and a leading producer of copper, platinum and palladium, is highly interested in its smaller Canadian counterpart as it feels an urgent need to expand into foreign markets and become competitive in the global commodity crunch amid the aggressive consolidation ventures from global players like BHP Billiton, Anglo American and Rio Tinto.

The deal comes in the midst of record-high nickel prices, up 45% this year on the base of very high capital spending worldwide, and high demand for stainless steel, a primary component of which is nickel. If Norilsk Nickel succeeds in this deal it would be the largest foreign acquisition by a Russian business to date and would open up the doors for more such expansions from the likes of Severstal, Basel, Evraz Group, and others.

The battle for control of LionOre started in March with a bid from Xstrata of C$4.6bn, trumped last month by a bid of C$5.3bn from Norilsk. This blog has extensively covered the bidding war. Xstrata quickly increased its offer to C$6.2bn, but then Norilsk raised the stakes with a bid of C$6.8bn or C$27.50 a share, a price that led some in the industry to worry that prices were getting out of hand. The acquisition will be the biggest a Russian company has pursued externally so far and only looks to be the start with the pending battle of Russian government-owned Aeroflot airlines for Italy's Alitalia, and Basel's purchase of a controlling stake in Canadian parts maker Magna International.

Business Update: Norilsk Nickel - Xstrata

Russian mining conglomerate Norilsk Nickel on Wednesday morning confirmed its decision to stay in the bidding for Canadian LionOre by trumping the recent bid for the company from Swiss-based Xstrata by 10%, now offering $6.3 billion (C$6.8billion), representing a 28% premium on its original offer in early May; the entire bidding process has been covered in this blog in greater detail in previous posts.

Norilsk Nickel, the world’s largest nickel miner and a leading producer of copper, platinum and palladium, is highly interested in its smaller Canadian counterpart as it feels an urgent need to expand into foreign markets and become competitive in the global commodity crunch amid the aggressive consolidation ventures from global players like BHP Billiton, Anglo American and Rio Tinto. As Canada's Globe and Mail reports:

Norilsk “sold some oil and gas assets in the Soviet Union in order to build up its bank account — it sorely wants to get a hold of [Lionore] strategically,” said David Rea, chairman of Toronto-based Davis-Rea Ltd. “I think Norilsk will get it.”

Earlier this month, Norilsk confirmed it plans to spin off its energy assets worth roughly $7-billion (U.S.), a move that could help it fund a bid for LionOre.

Analysts said acquisitions were crucial as declining ore grades mean Norilsk's mines in the Russian Arctic are processing more raw materials to produce the same amount of metal.

“This acquisition could potentially change investors' views of Norilsk over time,” Mr. Pukhayev said, adding a greater world presence would cut political risk attached to the company.

Financial Times in today's article reports of people close to Xstrata, saying that the valuation for LionOre has become too pricey for realization of much future value, and that Xstrata is less likely to continue the bidding. A factor that supports this notion is the guaranteed deal breakup fee Xstrata is to receive from LionOre if Norilsk Nickel prevails in the bidding of $305 million. Yet analysts from Troika Dialog polled by the Wall Street Journal admit that at such high valuations LionOre may still be a good strategic fit for Xstrata which is a "customer" of LionOre.

The Russian company just as Xstrata received the backing from German regulatory authorities, adding to an earlier agreement from the Canadian Competition Bureau. If LionOre confirms the bid by Russian nickel giant to be superior for the shareholders, Xstrata will have five days to decide on its participation in the auction, otherwise the offer stands until June 18th.

The deal comes in the midst of record-high nickel prices, up 45% this year on the base of very high capital spending worldwide, and high demand for stainless steel, a primary component of which is nickel. If Norilsk Nickel succeeds in this deal it would be the largest foreign acquisition by a Russian business to date and would open up the doors for more such expansions from the likes of Severstal, Basel, Evraz Group, and others.

Business Update: Airplanes and Metals (Aeroflot - Alitalia; Norilsk Nickel - LionOre)

Aeroflot - Alitalia

Aeroflot, which has been permitted into the second and most likely final round of bidding for the ailing Italian flagship carrier Alitalia has begun "hunting" for money to finance the deal. According to Vedomosti, Aeroflot, which has teamed up with Italian bank Unicredit, is looking to obtain 500-900 million Euros for the 39.9% stake of the Italian government in Alitalia. The Russian carrier intends to use only external funds in the deal, and has sent letters requesting funding proposals to the top twenty investment banks located in Moscow. Analysts cited by Vedomosti say that the credit that Aeroflot is seeking is fairly large but should be compensated by the steady cash-flow of the company and the virtual debt-free condition of Alitalia. Previously the blog has reported the news of Aeroflot seeking to buy Alitalia.

Meanwhile Alitalia is encountering events likely to trigger complications to the privatization of the company. The Financial Times reports that the airline is set to write-down over 400 million Euros in fleet value which will reflect negatively on its earnings this year. The company's shares have been in free-fall for the past weeks, already at 0.87 Euros, after it became clear that the target acquisition price of all the bidders will not exceed 0.50 Euros per share (a 40% discount to the company's current value. The company has recently been involved in a pay dispute with its staff which has caused major delays and contributed to the major losses to the company's bottom line. All these events are making the company seem cheaper for the bidders.

Norilsk Nickel - LionOre

In the continuing battle for Canadian nickel miner LionOre, the original bidder Swiss-based Xstrata trumped the bid by Russian Norilsk Nickel, now offering 16% more for the company representing a total of $5.6 billion. Xstrata's second offer represents a 35% premium to its original offer. Further disappointing the management of Norilsk Nickel, the Financial Times reports that Xstrata has gained approval for its second offer from LionOre's board, effectively locking up close to 20% of the company's shares. It has also received the necessary approvals from Canadian and EU authorities for the acquisition. The initial details of the deal were covered in a previous post in this blog.

Analysts cited by Vedomosti, claim that Norilsk Nickel must offer at least 20% more than Xstrata for the company to generate interest from the board and the shareholders of LionOre. Whether the deal at that point will be cheap remains questionable. Despite a greater business tie-up between LionOre and Xstrata, Norilsk Nickel is very keen to continue expansion into foreign markets to catch the last few waves of consolidation within the commodity industry. The Russian company, headed by Vladimir Potanin has till May 25 to come up with a competing bid.

Norilsk Nickel's Global Commodity Appetite

Thursday, Norilsk Nickel, accounting for 20% of the world's nickel output announced its entry into the bidding for Canada's LionOre by trumping a previous bid by Swiss Xstrata by 16%. The total amount of money Norilsk Nickel is planning to lay out is $4.8 billion dollars, a 23% premium over the closing price of LionOre before the bid by Xstrata.

Norilsk Nickel is the world's largest producer of nickel and palladium run by Vladimir Potanin. LionOre, despite its Canadian origin owns nickel mines in Botswana, Australia, and South Africa. Xstrata, Swiss-based, owns both nickel mines and refinery plants, and is very diversified into other commodities, such as copper, gold, and coal.

The consolidation processes in the nickel industry comes in the midst of record-high nickel prices. You would think oil is expensive; nickel has surged 67% since the start of the year. The Wall Street Journal reports that there are very limited amounts of new mining projects, in contrast to record demand for stainless steel products in emerging markets. Analysts, interviewed by Gazeta.ru have expressed surprise that the bid comes at such high prices, as the company would have cost Norilsk Nickel several times less at the end of last year. Yet the bidding is most likely explained by the urgent need for the Russian nickel monopoly to control a larger share of one of the world's hottest commodities in anticipation for high demand over the next several years.

The acquisition attempt has been viewed positively by Norilsk Nickel investors, with its stock jumping almost 3% on the announcement (the usual practice is for the acquirer's stock to fall due to the expected cash outflows, debt undertakings).

Norilsk Nickel has been very active to gain a greater foothold in international markets. It has made several major acquisitions in the past few years, including US miners Stillwater Mining Co, and nickel producer OM Group Inc. If the deal goes through it would be the largest acquisition of Russian-based companies overseas. Yet hurdles remain as Xstrata will most likely attempt to trump Norilsk Nickel's offer, the analysts questioned by Wall Street Journal report. The Financial Times, citing Simon Toyne of Numis Securities in London, reports that:

"there is greater industrial logic in the combination of Xstrata and LionOre than [in] Norilsk and LionOre. Xstrata already owned the Nikkelverk refinery in Norway, where LionOre’s African production is processed, and LionOre’s skills would help Xstrata to develop its Kabanga and Koniambo nickel projects, said another analyst."

NOTE: Last year, Russian corporations spent more than $11bn on foreign acquisitions, according to Ernst & Young. Most recently, Russian steelmaker Evraz bought Oregon Steel in the US for $2.3bn. In April, Russia's biggest airline Aeroflot announced its intention to participate in the acquisition of a stake in Italian airline operator Alitalia. Earlier this year, Hungarian airline operator Malev was sold to Russian AirUnion.