Russian tire holding Amtel has been forced to sell a portion of its stock to institutional investors. The market for the stock of second-tier companies in Russia is stagnating and borrowed funds are already too expensive for the company.

Andrei Vinkov

Last week, Amtel Tire Holding, represented by General Director Alexei Gurin, announced the sale of 14.5% of stock in Amtel Holdings Holland, its parent company. The stock will be sold to two investment companies whose names have yet to be disclosed. “We have signed two term-sheets – the so-called general terms and conditions of the deal – with two organizations,” Gurin declared. According to the general director, an international investment fund will acquire about 4.5% of the stock, and around 10% will pass to a Russian investment bank. Stock from the holding’s present shareholders will make up part of the sold stock and an additional issue will constitute the rest. The total amount of deals will be $50 million. This event will doubtlessly set a precedent for the Russian petrochemical industry where efficient businesses and transparent public companies are just emerging. There is just one snag.
The Amtel sales have been timed inappropriately. If the company sells 14.5% of its stock for $50 million it capitalization amounts to $350 million. However, Amtel intended to increase its capitalization to half a billion dollars by as soon as 2005, so the price of the stake for sale would rise. Why couldn’t Amtel’s owners wait for a year?

By the book

The development of the Russian tire market has reached a point when Amtel cannot afford to miss this opportunity.
As Alexei Gurin told Expert, a consumer boom is expected on the Russian tire market as more and more Russians purchase cars. Using Eastern Europe for comparison, there are 250 cars for every thousand people, whereas in Russia, this index hardly reaches 150. Gurin believes that as active modernization of production is under way, Amtel will be able to increase its market share rapidly as far as mid-priced products are concerned, since other large Russian tire manufacturers (Sibur and Nizhnekamskneftekhim) are lagging behind at the moment. Both Sibur and Nizhnekamskneftekhim are non-core businesses for Gazprom and Tatneft, respectively. Funds have not been invested in the modernization of these assets so far.
In this case, the tire market for the middle class will become the most important playing field. Alexei Gurin believes that Russian companies need to take it over before foreigners do. Especially as tire production in Russia costs a third cheaper on average than abroad. “Amtel is indeed an interesting case,” Sergei Suverov, Head of the Analytical Department at Zenit Bank, confirms. “They are developing production in earnest. Unlike other Russian rivals, they have reduced their dependence on raw materials. As the market share of good quality tires increases [see diagram 1], Amtel is modernizing its production facilities. However, Amtel seems to have exhausted its ability to raise borrowed funds.”
As of late last year, Amtel Holding’s total debt was estimated at about $120 million, revenue at $383 million and EBITDA at $52 million. According to Maxim Moshkov, a financial analyst at Brunswick UBS Investment Company, the borrowings/EBITDA ratio at companies with stable operations should not exceed 1.5. At Amtel, however, this index is approaching 3. According to Amtel’s general director, in 2003 the holding’s debts increased by $70-80 million versus 2002. This meant an increase in interest on loans of around $5 million. The large amount of loans was linked with the fact that Amtel had almost fully bought out all minority shareholders in its Russian enterprises. In the end, it has become more profitable for Amtel’s owners simply to attract equity capital, especially as, according to estimates by Sergei Suverov, Amtel has a limited amount of liquid mortgaged property.

The Finns’ example

The divorce from Finnish Nokian, with which the holding had a joint venture in Russia, finally forced Amtel to look lively in the field of finance. Alexei Gurin admitted that Amtel once hoped to take over Nokian, currently worth around 800 million euros. Amtel even made an offer to this end three years ago. It offered 34 euro per share for a 20-percent stake in the Finnish company but then Bridgestone, another world tire leader, outbid the price by offering the rate of 39 euros per share. After that, the relations between Nokian and Amtel began to deteriorate.
The forced change in strategy led Amtel to decide to develop on its own, especially as there are all pre-conditions for success. By the example of Nokian, Amtel saw first hand how the company’s value increased from 300 to 800 million euros, in fact, only thanks to the Finns’ decision to enter the Russian market. Amtel decided to enter the London Stock Exchange on its own. In September 2003, the holding made an agreement with Templeton Investment Fund on additional issue of the holding’s papers in favor of the fund. As a result of the agreement, Templeton became a holder of a 3.75% stake in Amtel and gained the option to purchase almost another 2% over the next six months (the Fund bought out this stock in March 2004). To all appearances, the deal with Templeton was designed to get indicative estimate of the company’s capitalization. At that time, it amounted to $265 million. By now, new partners – investment companies – have appeared in Amtel’s chartered capital. This is why they can be expected to help Amtel increase its capitalization to half a billion dollars. “Even taking the situation with YUKOS and underestimation by investors of second-tier stocks into account, Amtel has a chance to succeed,” believes Sergei Suverov. “Since the company has foreign owners, which protects the company against the risk of seizure of this ownership. Moreover, Amtel is consumer market-oriented.”

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