UPDATE 1-Kremlin sets sights on titanium takeover http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2006-07-19T110807Z_01_L19551546_RTRIDST_0_MINERALS-RUSSIA-TITANIUM-UPDATE-1.XML
Wed Jul 19, 2006
(Adds detail, analyst comment)
MOSCOW, July 19 (Reuters) - Russian state arms trader Rosoboronexport aims to acquire up to 70 percent of VSMPO-Avisma (VSMO.MM: Quote, Profile, Research), the world's largest titanium producer, as the Kremlin extends control over strategic assets, Russian media said on Wednesday.
The deal, which one analyst valued at nearly $1.5 billion, could be completed by summer's end and has raised concerns about security of supply to VSMPO-Avisma's customers in the aerospace sector, including Boeing (BA.N: Quote, Profile, Research) and Airbus (EAD.PA: Quote, Profile, Research). VSMPO-Avisma's co-owners, Vyacheslav Bresht and Vladislav Tetyukhin, repeatedly declined to comment.
The company's website says they are the largest producers of titanium, a lightweight refractory metal used in aircraft construction. "Rosoboronexport's impending acquisition of a controlling stake in VSMPO is likely to be followed by consolidation of the company into a state-owned specialist metallurgy holding," UralSib Bank said in a note.
"This is a major risk for the stock in our view, given that VSMPO may have to subsidise financially weaker companies."
Rosoboronexport General Director Sergei Chemezov told reporters at the Farnborough International Airshow in England on Tuesday the company would soon acquire "more than half" of VSMPO-Avisma and that talks had "practically finished".
Vedomosti business daily on Wednesday quoted Chemezov as saying Rosoboronexport would buy a 27 percent stake from Tetyukhin, who owns 30 percent of VSMPO-Avisma.
The newspaper said Bresht had sold his 30 percent two weeks ago to investment company Renaissance Capital, which had earlier bought a separate 10-11 percent stake.
Vedomosti, quoting a source familiar with the deal, said Renaissance Capital had agreed to sell almost 40 percent in VSMPO-Avisma to Rosoboronexport, although half of this package is held by its clients.
If this happens, Rosoboronexport would control more than two-thirds of VSMPO-Avisma.
Neither Renaissance Capital bankers close to the deal nor Rosoboronexport officials could be reached for comment.
AEROSPACE POWERHOUSE
Rosoboronexport has repeatedly said it is seeking control of VSMPO-Avisma as the Kremlin moves to corral strategic Russian assets and build a national aerospace and military powerhouse.
Chemezov has given no indication of how much Rosoboronexport would pay for the majority stake in VSMPO-Avisma. He said the stake would be bought at market price and the deal would be financed by state banks.
"Based on VSMPO-Avisma's current market capitalisation, it may cost Rosoboronexport nearly $1.5 billion to acquire a 67 percent stake from current shareholders," UralSib Bank said.
VSMPO-Avisma supplies 35-40 percent of the titanium used by Boeing. Bresht told Reuters in May this share would rise to 40-45 percent next year or even 50 percent by the end of 2007.
The company, which produces titanium in the town of Verkhnaya Salda, in the Ural mountains, also won 60-70 percent of contracts to supply Airbus between 2007 and 2012.
"VSMPO is a particularly difficult asset to manage. It's a complex production cycle and demands for quality are extremely high," said Tim McCutcheon, partner at Moscow-based DBM Capital.
He added customers had built personal relationships with the current owners that Rosoboronexport would need time to match.
"Although, to a certain extent, the main customers of VSMPO don't really have an alternative supplier ... it will take a long time for the customers to get comfortable with them," he said, referring to Rosoboronexport. Bresht, Tetyukhin and Boeing have previously said a change of ownership would not affect titanium supplies. VSMPO-Avisma also plans to invest $650 million to raise titanium output more than 60 percent by 2010.
Boeing alone plans to spend $18 billion on purchases of Russian titanium over the next 30 years.
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