Russian businessman Alisher Usmanov has become part owner of Corus Group, one of the biggest steel makers in the world.

Andrei Vinkov

Yet another new precedent has been set in the brief history of Russian business. In the first days of September, the British company Gallagher Holdings Ltd., of which Russian businessman Alisher Usmanov is the sole proprietor, announced its purchase of 6.9% of the Corus Group, one of the world’s biggest steel producers. It also became known that the company has sent documents to US regulators requesting permission for Usmanov to expand his stake in Corus to 10%.
Corus was formed four years ago after a merger between well-known British Steel PLC and Dutch Royal Hoogovens NV. Until a few years ago, Corus was fifth in the world in terms of production and third in terms of sales.
Until recently, no one in Russia, be they metal magnates or oil barons, had dared to buy a chunk of stock in a large global corporation. At best they purchased small or medium-sized companies in Europe, especially Eastern Europe. Alisher Usmanov wanted more. Russian businessmen never suspected that this crazy idea would yield not only political dividends, but also actual profits.

Buy low

Usmanov’s representatives gave us the official version of the purchase and sketched out their goals in general terms, but refused go into detail. We have reconstructed Usmanov’s aims.
Due to a fall in steel prices, at their lowest level in forty years in 2002, and to a strong euro, European steel companies wound up in serious economic difficulty. Corus was on the brink of bankruptcy. Since its founding, the company has in the last four years reduced its steel output (from 21.3 million tons in 1999 to 17 million in 2002) and had only losses to report to investors (see table). As a result, by the middle of 2002 Corus’ debts exceeded 2.5 billion euros. Corus has made major layoffs, which put further strain on its budget as the company was forced to pay severance packages. The company temporarily stopped paying dividends and raised prices on some of its products. To pay off its debts, the company announced last March that it would be selling its aluminum division. However, the board of directors rejected the plan, provoking an angry response from management and a law suit. This March, an Amsterdam court rejected Corus’ request to review the board’s decision. Not only did it have to turn down $900 million, it also had to pay 20 million euros in damages to the unsuccessful purchaser, the French company Pechiney Group.
As a result, Corus Group’s capitalization fell from $9.28 billion in January 2000 to $210 million by this March (see graph).
That’s when Usmanov stepped in, who already owned the Oskolsky Electro-Metallurgy Plant, the Lebidinsky foundry, and part of the NOSTA Plant and Olenegorsky foundry. He bought 5.11% of Corus’ stock when its price was at its lowest. Usmanov paid a pittance for his five-percent share with the potential to earn $17 billion, according to various sources anywhere from $13 to $40 million. According to Usmanov’s official version, the stock purchase was seen first and foremost as a successful financial operation.

More than speculation

Theoretically, Corus shares are already turning a profit. Their price has been going up for the last few months in a row (see graph). However, speculation can only be considered successful when shares are sold at a profit. How can they be sold at a profit on a market with little inclination toward active buying? This means that in addition to his financial interests, Usmanov appears to have his sights set on other kinds of gain as well.
Early this year in an interview with the newspaper Vedomosti, Usmanov related: “All our projects work the old-fashioned way. We borrow money and invest it in a new company that is as a rule either in a state of bankruptcy or in serious financial trouble. After gaining control over its assets, we improve its finances so that we can make a profit off its future activity. After a certain period of time, we return the money to lenders.” The seriously troubled Corus fits into this scheme perfectly.
Russia currently produces what is probably the cheapest steel in the world. However, the European market is closed to Russians due to anti-dumping regulations. If Europeans and Russians would cooperate, a more competitive final product made from inexpensive Russian raw materials and intermediate products could profit everyone. Europeans could recover from their current crisis, and Russia could expand its steel exports to Europe. A relationship of this sort has already been attempted several times with small European producers, by Alexei Ivanushkin and Mechel at Croatian and Rumanian foundries and by Vladimir Lisin and NLMK at the Danish company, Dansteel.
Usmanov’s Gallagher Holdings, rumor has it, has already begun negotiations with Corus managers regarding the possible use of supplies from Russian NOSTA and OEMP. In addition, Lebedinsky might also become a link in the chain. According to Nikolai Ivanov, a metal and machine tool industry analyst at Prospekt Investment Company, “By producing 30-35 million tons annually Lebedinsky could supply all most all of Corus’ raw materials. If it supplies a large amount, the company could get serious discounts from transporters, up to 25%.”

Not just slabs

Everything seems to indicate that when buying the troubled Corus, Usmanov knew full well there were profits to be made and little risk involved.
Yet why didn’t other, clearly bigger and richer investors take advantage of the opportunity, such as Lisin and NLMK (which netted $500 million in profits in 2002) or Alexei Mordashov and Severstal (netting $200 million)? Obviously, investing in Corus Group stock and initiating various steel producing business schemes won’t prove profitable unless problematic plants are brought under control. Ivanushkin and Lisin’s companies bought controlling stakes in European factories. Usmanov, on the other hand, hasn’t at this point. And this is another very serious risk for strategic investment in Corus, likely to kill any interest in the company on the part of Russian steel magnates. In addition, Brazilian CSN and Indiana Lakshmi Mittal are also vying for strategic control and for Corus stock.

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