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By John Helmer in Moscow

Uralchem is the latest of Russia’s fertilizer producers and exporters to ask the London stock market to subscribe funds on trust. Between $496 million and $642 million worth of trust, according to the document entitled “Preliminary Prospectus” issued for Uralchem on April 19. The offerors are Renaissance Capital, Morgan Stanley, UBS, and Unicredit, with a hand in broking from Russia’s state savings institution, Sberbank.

According to the small print, the banks don’t vouch for the veracity of their pitch. “None of the Managers makes any representation, express or implied, or accepts any responsibility, with respect to the accuracy or completeness of any of the information in this prospectus.”

The prospectus notes that Uralchem ended last year selling $949 million worth of mineral fertilizers and related products, roughly half the value of its sales in 2008. The bottom-line of the Uralchem consolidated income statement for the year ended 31 December 2009 was a loss of $119 million, and its debt was $1.5 billion (including lease obligations). At least $545 million of that total must be repaid or refinanced this year. The year before, despite nine months of boom sales, profit was just $76 million; in 2007, it was $52 million.

Russians have proved to be better at creating the appearance of powerful resource and commodity corporations than at managing the pyramid of debt on which these structures depend. Their success at passing on their debt to the public stockmarkets has been less famous. Most of the Uralchem debt was racked up in the year 2008, as Dmitry Mazepin, Uralchem’s chairman and controlling shareholder, paid high prices on takeovers to create what he hoped would be a portfolio of assets foreign investors would snap up at an even higher premium, rewarding him with a hefty cash profit. Mazepin paid $381 million for control of Voskresensk Mineral Fertilizers (VMF); $226 million for a 10% stake in TogliattiAzot, an ammonia producer which had been under hostile pressure for several years; and $109 million for plush office premises in Moscow (a transaction whose valuation has been challenged subsequently). Then as fertilizer prices, grain prices, and global trade crashed, the IPO was put off. The ambition has come back to bite Mazepin now.

Once Mazepin had bought 70% of VMF in August of 2008, he was obliged by Russian law to make a mandatory buyout offer to the minorities. The largest of the minority stakeholders, with 24%, was held by an offshore company, Shades of Cyprus Ltd.. Backed by Phosagro, a commercial rival of Mazepin’s in Russia, the 24% stakeholder notarized its acceptance of the buyback offer, executed its instruction to the share registrar to transfer its bloc of shares to Uralchem’s account, and with a Phosagro executive went directly to the Uralchem headquarters on the deadline day of October 22, 2008. But as the subsequent litigation suggests, Uralchem had closed the buyback window, claiming the Shades application was too late.

Shades is now suing Sberbank in Moscow as the guarantor of Uralchem’s payout. The case began in February 2009, and on February 24, 2010, the Arbitrazh Court ruled the claimants had failed to demonstrate proof they had filed their sale documents, and that Uralchem had received them, in good time. The court also ruled on a technicality that Sberbank’s guarantee covered a payout obligation which had been withdrawn, not the payout whose deadline was October 22. The case has gone on appeal to the higher level of the court.

“This has been an open issue for two years;” comments a Moscow company analyst, “so far nothing has happened. Not in Russia.” The risk section of Uralchem’s prospectus mentions the possibility that new shareholders might be buying into more losses and potential insolvency. In its litigation section, Uralchem also acknowledges the VMF minority shareholder dispute, and the ongoing court case. But it adds: “management believes that the unfavourable outcome is unlikely” That, of course, is in Russia. But should potential London shareholders share the equanimity that they will not be treated as were the VMF minorities?

Mazepin owns 95.5% of Uralchem’s shares now. If there are willing takers for his shares at his asking price, he will control 55% after the listing, with a free float estimated at 44%, and a handful of managers with what is left. But the Shades group continues to pursue their court claim in Russia for Rb3 billion ($106 million).

Uralchem admits part of the story. “In August 2008, following our acquisition of 71.7% of the shares of VMF, we made a mandatory tender offer required by Russian law to all shareholders of VMF for the purchase of the remaining shares of VMF at a price of 20.29 roubles per share. As required by Russian law, the offer was secured by a bank guarantee, which was provided by Sberbank. The offer closed on 22 October 2008.”

If Mazepin won’t honour the claim for the 24% bloc of VMF shares, and the claimants are precluded from suing for recovery outside their Russian domicile, there remains a regulatory problem for the Listing Authority of the London Stock Exchange and the regulator of the proposed IPO, the Financial Services Authority. If what was sauce for the goose when Mazepin was building Uralchem in 2008, the FSA is bound to be curious about what may be sauce for the gander this time round. . Except that Uralchem’s issues this warning in the prospectus to prospective new shareholders in London: “Our presence outside the United States and the United Kingdom may limit your legal recourse against us.”

On page 119 of the prospectus, Uralchem acknowledges the goose-for-gander effect is serious, with a contingent liability as big as Uralchem’s 2009 loss. “If the court rules in favour of Shades of Cyprus Limited and Sberbank pays 3.09 billion roubles to the claimant, then under the bank guarantee, we must reimburse Sberbank for this amount. Sberbank has currently provided us a line of credit in the amount of 3.09 billion roubles available until 31 December 2011 which may be drawn only for the purpose of covering our potential payment obligation to them. If Shades of Cyprus Limited ultimately prevails in the litigation against Sberbank and we are required to reimburse Sberbank for 3.09 billion roubles, any such payment would have a material adverse effect on our financial position.” Roughly one dollar in four of the IPO proceeds yet to be raised is thus at risk in the share claim.

There is also the risk that Uralchem’s earnings projections have been exaggerated by the share promoters. A report this week by Alfa Bank analyst by Georgy Ivanin warns that Mazepin is overvaluing the company, and risking new shareholder funds with a punt on lifting his earnings.
Ivanin wrote clients: “UralChem is valued at $1.24-1.60 b[illion], which we think is too aggressive… Even if UralChem manages to increase EBITDA by two times, it will roughly imply 2010 EV/EBITDA of 9.3x-10.3x compared with 5.5x for Acron and 8.5x for Yara Int, the global benchmark for nitrogen fertilizer producers….We think it would be hard for the company to place its shares at such high multiples, or the company needs to reassure investors that it would be able to increase its EBITDA more significantly.”

Anna Kupriyanova, the fertilizer industry analyst for Uralsib Bank, comes to the same conclusion. Her table of valuations suggests that international sharebuyers are unlikely to pay a premium price for Uralchem’s new shares on a wager that Mazepin can lift revenues, lower his costs, cut his debts, and increase his earnings by several magnitudes more than his international peers can achieve:

Source: Anna Kupriyanova, Uralsib Bank, Moscow

Yara of Norway and Terra of the US are the international fertilizer benchmarks in Uralchem’s line of business. Their financial strength dwarfs Uralchem; their debts are a small fraction of Mazepin’s. Yara has a current market capitalization of $11.3 billion; its 2009 profit was $641 million; and its debt is about $540 million. Terra’s market cap is $1.6 billion; its 2009 profit was $101 million; and it has no debt. Kupriyanova’s calculations suggest that unless Uralchem strikes an earnings (Ebitda) level of $350 million this year – a figure reportedly circulated by the share promoters – it cannot bear the comparison.

But according to the Uralchem prospectus, Ebitda for 2009 was $72 million. Mazepin’s consolidation of assets into the Uralchem holding may have been magical so far. But multiplying earnings fivefold is a feat few believe he can pull off for the London audience.

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