January 28, 2019 / 1:57 PM / in 3 months

Breakingviews - Deripaska markdown will persist at En+ and Rusal

Russian tycoon Oleg Deripaska attends a session of the St. Petersburg International Economic Forum (SPIEF), Russia, June 1, 2017. REUTERS/Sergei Karpukhin - UP1ED6114UG3C

LONDON (Reuters Breakingviews) - Call it the Deripaska discount. Shareholders in Rusal and En+ received the news they’d been waiting for on January 27 when the U.S. Treasury unshackled them from sanctions imposed last April by its feared Office of Foreign Assets Control. Still, the reluctance of their shares and global depository receipts (GDRs) to fully return to their pre-sanctions levels suggests lingering concern over the continuing presence of former majority shareholder Oleg Deripaska.

Compared to where they were on April 6 last year – the day the U.S. put them on its sanctions list – the two companies will be delighted. Rusal, the world’s second-biggest aluminium producer, was punished because 48 percent of its shares were held by En+, which in turn was 70 percent owned by the Russian oligarch. Global aluminium prices surged by a third, and Rusal’s Hong Kong-listed shares and En+ London-listed GDRs both more than halved in value.

Following a convoluted corporate restructuring masterminded by En+ Chairman Greg Barker, the two companies have distanced themselves from Deripaska. The oligarch still holds 45 percent of En+ but only 35 percent of the voting rights. Under a settlement outlined on December 19, he cannot access dividends or sell his shares. The En+ board also now has a majority of independent directors.

Yet despite a hefty bump since December 19, Moscow-listed shares in Rusal and En+ are still trading below where they were on April 5. Back then, the En+ holding in Rusal was equivalent to 62 percent of its overall market value of $7 billion. The holding company is now worth $5.2 billion, and its increased Rusal shareholding accounts for more than 80 percent of that. Rusal shares listed in Hong Kong trade at a 14 percent discount to the equivalent securities in Moscow, suggesting that international investors are still wary.

Notwithstanding that aluminium prices are now 4 percent lower than last April, investors’ pessimism has two drivers. One is that Rusal’s customers may treat it as a less solid counterparty than before. The other is the risk of sanctions being reimposed on the two companies.

This shouldn’t happen, but the December 19 agreement contains potential loopholes: it’s not specifically ruled out that Deripaska could borrow against the value of his stake from a Russian bank, for example. Meanwhile, he remains the single largest shareholder of En+, even if his voting rights are muzzled. If there is any suspicion he is trying to reassert control, the Deripaska discount will get a lot worse.

Breakingviews

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