OAO Gorkovsky Avtomobilny Zavod (GAZ), the second-biggest automaker in Russia, faces suspicious threats of a hostile takeover that bodes ill for the car industry there.

Signs of an aggressive and stealthy bid have rattled GAZ plus its foreign partners European Bank for Reconstruction and Development (EBRD) and Fiat Auto SpA. The bidder is believed to be OAO Sibirsky Alyuminiy (SA or 'Sibal'), a pivotal player in aluminium production, the economic sector in Russia most known for corruption and crime.

Unwanted: Bandits

"The aluminium industry has been connected with names in the criminal world, so Fiat and GAZ worry criminals could creep into their venture, a world vacant of criminality until now," a source at ZAO Nizhegorod Motors (NM) told just-auto.com.

NM plans to build Fiat-designed vehicles at GAZ headquarters, 400km east of Moscow in Nizhny Novgorod, Russia's third-largest city (re-named Gorky 1932-1991). The venture is owned 40% by each automaker and 20% by EBRD.

Fiat-GAZ Venture
NAME ZAO Nizhegorod Motors
SITE Nizhny Novgorod
.... 40% GAZ
.. 20% EBRD
INVESTMENT initially $850m / currently $350m
START Q2 2002
CAPACITY 75,000 units / year in 2 shifts (target 2005)
PRODUCTS Palio, Palio Weekend, Sienna
SOURCE just-auto.com

Naturally rich, artificially poor

"The fundamental problem is an imbalance in Russia's economy," the source said.

"Big enterprises like Sibirsky Alyuminiy have become excessively rich, yet they make no value-added goods: they sell natural resources with limited processing… Meanwhile, mass-producers of sophisticated items like cars remain poor, so they are easy prey for wealthy vultures. GAZ is poor, compared to industrial concerns of its size in Western Europe... In Russia, finished-goods makers must fare better in the economy's pecking order - to be strong enough to resist attacks by speculators with unclear motives. Of course, Sibirsky Alyuminiy wants a return on investment, but its use of this return is another question entirely."

GAZ's Financial Results
(Data in $m)
1999 F
2000 F
2001 F
Net Sales
Net Profit

When asked about the image of criminality surrounding the aluminium industry in Russia, SA public-relations official Alexey Zlovedov said, "Unfortunately, this is the image. It reflects an early period of wild privatisation... We want to run transparent operations… We are moving toward a Western business style. In the old style, personal connections counted most... Now financial results come first… A new time has come. In business generally in Russia, bandits have left, or they are leaving. In the aluminium sector, few remain."

Russian alchemy: aluminium into equity?

A battle for control of GAZ has been brewing for months, and the intrigues often have been hard to interpret, even for insiders. But informed observers now believe Sibal is mounting a complex challenge for the automaker, by exploiting the limited requirements for transparency in business deals in Russia.

Through a series of murky transactions apparently begun in August, the aluminium group already may have amassed a blocking stake in GAZ of 25% plus one share (enough to veto strategic votes at annual shareholder meetings), officials close to the automaker said.

If SA would be hoarding a large stake, it alone may know the size because it would be buying the shares via disguised and indirect representatives, a common practice of corporate raiders in Russia. (If the aluminium group would be directly purchasing significant volumes of the stock, it would have informed the public. Under Russian securities law, a shareholder must report its identity and stake, once it acquires 5% of a company's equity.)

Sibal denies interest in GAZ

SA has disclosed no position in GAZ. Rather, it has said categorically and repeatedly that it and its affiliates own no shares and plan to own no shares in the automaker, according to Russian media reports.

Sources working with GAZ dismissed SA's statements as bluffs to calm concern about an impending takeover of the automaker.


Sibal has shown interest in the auto sector. In August, it took control of AO Pavlovskiy Avtobus (PAZ), the biggest busmaker in the ex-USSR, based in Pavlovo, a city in the same region as Nizhny Novgorod.

When SA took over PAZ, it "publicly announced its interest in further acquisitions of automotive assets in Russia," according to a brief by United Financial Group (UFG), an investment bank in Moscow.

Zlovedov said SA now is too busy with PAZ to invest elsewhere in the auto industry.

"Sibirsky Aluminium likely will acquire a controlling stake in GAZ."
- Maxim Matveev, auto analyst at Alfa Bank in Moscow

UFG's brief also cited an interview in a Russian newspaper with GAZ management acknowledging "growing evidence of some party's plans for a hostile takeover…"

Still, any evidence that may point to the identity of a predator is ambiguous.

Each quarter, GAZ issues financial reports with information on owners of 5% or more of its stock. Direct investors are named. But indirect investors, exercising ownership through agents or nominees, are not listed; only the nominees appear.

The key obstacle to understanding GAZ's ownership: agents have been handling roughly a third of the automaker's equity. Compounding this problem, one nominee may act for multiple owners; and a nominee of a share package may stay the same, even when the owner of that stock switches. (Potential for plots, and speculation about them, is rife.)

In GAZ's financial statements this year, spikes have occurred in the stake of Depositarno-Kliringovaja Kompanija (DKK or Depository Clearing Company). DKK is a nominee whose holding in the automaker was 6.6% in the first quarter and 11.6% in the second quarter, according to Aton Capital Group in Moscow. DKK is understood now to hold close to 19%, though the report for the third quarter will be out only in late November. Sources close to GAZ said DKK acts for SA. But no one outside DKK and Sibal seems able to prove it.

Uncertainty principal

Alfa Bank, the largest private lender in Russia, recently accumulated a 5% stake in GAZ. But even it claims not to know a breakdown of the automaker's shareholders.

"Exact information is unavailable on the current ownership structure of GAZ," said Maxim Matveev, auto analyst at Alfa Bank in Moscow. "The most interesting point is the uncertainty, though I believe Sibirsky Aluminium has at least 20% of GAZ, and it has been in talks to buy a further 30%. I do not know whether that deal is finished, but 30% is available on the market, and anyone can buy it. Sibirsky Aluminium likely will acquire a controlling stake in GAZ. The question is the price."

The fight for GAZ may not rivet the auto world like the astonishing plays for the former Chrysler Corp by entertainment mogul Kirk Kerkorian in the 1990s. But this is no backstreet tussle.

GAZ on fast track from communism to capitalism

Since the USSR dissolved in 1991, GAZ has best embodied the potential for Russian automakers to survive privately without a major patron (domestic or foreign), overcoming decades of inefficient production of poor-quality vehicles under Communism.

A marvel to industry observers worldwide, GAZ is alone among big carmakers in Eastern Europe to up output every year since 1991, a feat unmatched even by Czech automaker Skoda Auto AS, owned munificently by European powerhouse Volkswagen AG.

In the mid-1990s, GAZ became the biggest maker of commercial vehicles in the old East bloc, by dramatically revamping its products. It gutted its archaic line of trucks, while innovating cheap and decent lines of minibuses, utility vehicles and vans that have enjoyed great popularity, especially among small businesses.

This year, the automaker has been gradually launching production of a new car, Volga 3111, poised to be the best-ever passenger vehicle of Russian origin. It will feature options impressive for a vehicle born anywhere in Eastern Europe: air-conditioning, anti-lock brakes, central locks, driver-side airbags and power steering.

Tie-ups without tie-downs

Though GAZ has vowed to remain independent, it has cultivated international relations for credit, machinery and technology. It obtained loans from EBRD to expand and modernise assembly lines (provided by Mannesmann AG of Germany) and paint shops (provided by Haden Inc of USA). It bought a license to build diesel engines from Steyr-Daimler-Puch AG of Austria. And it has contracted Venture Industries of USA to craft fibreglass prototypes of four new vehicles since 1998.

The jewel among GAZ's foreign partnerships was cut and polished in December 1997, when NM was announced. Then the biggest international project to make vehicles in Russia, the venture was to invest $850m to build 150,000 cars a year. Output was slated to start in fourth-quarter 1998. GAZ was an equal equity partner with Fiat, a frank display of the auto industry's respect for the Russian company.

Crisis crimps GAZ

GAZ was on a roll, but the good times ground suddenly to a halt when Russia's economy collapsed in August 1998. The car business was hit hard. GAZ sustained its output of vehicles, but profit margins on car sales imploded.

NM has been forced repeatedly to postpone its launch of production, now slated for mid-2002, nearly four years behind the original schedule. Its profile has been shrunk to a $350m investment to build 75,000 cars a year.

Perhaps worst, the economic turmoil created cash-flow problems that still plague GAZ. The automaker defaulted last year on $80m in loans ($65m from EBRD, $15m from Avtobank). GAZ reportedly has offered its stake in NM to pay back taxes to the local government in Nizhny Novgorod.

Despite financial vulnerability that may have invited predators, GAZ has soldiered ahead. Its January-to-August production rose 1% this year versus last year, while output for the industry increased 2% in the same period, according to data from AO Avtoselkhozmash-Holding.

EBRD - future GAZ shareholder?

EBRD, long expected to exchange the debt for GAZ equity, has disclosed no plans. But it released a statement on October 30 excluding no options - except selling GAZ's debt.

"The EBRD has been working with GAZ's management to ensure the value of the company," the statement said. "This includes how best to restructure the EBRD's debt in the context of our long-term involvement with GAZ. The Bank has no intention of selling its debt."

A debt-equity swap would entail GAZ issuing new shares at a price agreed by the automaker and the banks, Matveev said. If the entire loans are traded for stock, if the new issue is set at $40/share, he estimated the stakes would be 25% for EBRD and 15% for Avtobank. (Avtobank already owns 10.2% of GAZ.) If the per-share price is $60, he calculated the holdings to be 18% for EBRD and 14% for Avtobank.

In either scenario, EBRD would become the biggest shareholder in GAZ, unless SA takes control first.

EBRD vs Sibal

Rumours, assumed by GAZ allies to come from SA, have circulated that the bank wanted to sell the debt - speculation that prompted EBRD's statement on October 30.

EBRD may have taken the unusual step of issuing the statement amid talks with GAZ because, sources said, the bank was approached by a Sibal representative seeking to buy GAZ's debt to EBRD.

To accelerate a takeover of GAZ, SA may be spreading stories inflating the size of its stake in the automaker to panic stockholders into selling shares, GAZ allies said.

"This could be a case of psychological warfare," one analyst agreed. "If Sibirsky Alyuminiy seizes control of GAZ, the market for GAZ shares becomes illiquid. No one will want to keep the shares because no one will want to be the last to hold them. Every investor fears this."

Avtobank behind EBRD

One GAZ owner unlikely to sell to SA is Avtobank, which was established by the automaker in the early 1990s. It is working with EBRD to restructure GAZ's debt. The two lenders hope to hold together a coalition of shareholders big enough to stop the aluminium group taking over the car producer.

"It is good EBRD has demonstrated its commitment to GAZ management," Julia Zhdanova, auto analyst at UFG, said. "We were afraid Sibirsky Alyuminiy would buy the bank's debt."

However, if SA manages to seize control of the automaker, plans between EBRD and GAZ may crumble. The bank could lose any incentive to take equity in the automaker, while GAZ's new owners could drive a hard bargain to buy the bank's loan.

To takeover GAZ, Sibal has ample cash reserves, it needs only time to consolidate enough small stakes, and not much time will be necessary, analysts said.

"GAZ stock has been trading around $50 a share, so its market capitalisation is $270m-$300m," one analyst said. "That means a 50% stake in GAZ would cost about $150m. If Sibirsky Alyuminiy would have to pay EBRD for the debt, the complete cost to control GAZ would be $250m. That is no problem for Sibirsky Alyuminiy… Rather, the problem for Sibirsky Alyuminiy is to find profitable areas to invest its huge surplus of roubles… GAZ and PAZ are among the few attractive assets to buy in Russia. They are not controlled by oligarchs, and they have undervalued shares, so they became targets."

SA will need to acquire only 25% plus one vote to jeopardise plans between EBRD and GAZ because the automaker would need to issue new stock for any debt-equity swap with the bank. A share issue would require a vote of 75% of GAZ owners at an extraordinary shareholder meeting, and the carmaker must give a one-month notice to stockholders before convening them.

Race for control

"Time is critical now," Zhdanova added. "EBRD must finalise a proposal soon to restructure GAZ's debt - to prevent Sibirsky Aluminium from gaining control of GAZ."

GAZ president Nikolai Pugin planned to travel to EBRD's headquarters in London this week. In the end, Pugin did not go, and the bank has not said when talks with him about the loans may continue.

In midweek, GAZ issued a statement that it had reached an agreement with EBRD on debt restructuring, even though no terms actually have been finalised. The move likely was aimed at calming any concerns among loyal investors.

But the panic is premature, sources following the saga said. "It is not easy to takeover a car company, even in Russia," one said. "Anyway, if EBRD felt Sibirsky Alyuminiy was merely days away from victory, I doubt the bank would have come out with the statement this week."

GAZ needs cash. Sibal has it. Perfect match?

Controversy over Russia's aluminium industry aside, SA can offer a lifeline of cash to GAZ, and some analysts argue the automaker would be foolish to reject the offer.

"Sibirsky Alyuminiy has large sums of cash, and automakers like GAZ need money to launch new vehicles and modernise operations," Alexander Agibalov, auto analyst at Aton Capital Group, said. "Such capital requirements can be satisfied in Russia only by strategic investors… It will be good for the auto industry, if Sibirsky Alyuminiy buys GAZ. This would mark another necessary step in consolidation of the sector. It will increase the vertical integration of the industry, so it should decrease production costs."

But auto observers question the commercial sense of SA buying GAZ because aluminium supplies to carmakers in Russia are insignificant. Rather, they suspect SA is trying to buff its image by diversifying into sectors outside metallurgy. "The aluminium business is affiliated with the black economy," one said. "GAZ is in the white economy."

Sources close to the battle over GAZ said SA still worries more about its immediate income than its long-term reputation. "I can see Sibal asset-stripping GAZ, perhaps skimming earnings off car sales or not paying dividends to other shareholders," one said.

If SA buys GAZ, the rights of other shareholders in the automaker concern UFG. "We are downgrading GAZ shares to a "hold" on the grounds of significant corporate governance risks potentially arising from the rumoured acquisition of a large stake in GAZ by Siberian Aluminium Group," UFG's brief in September stated. "We… remain positive on the long-term value potential of GAZ. Nevertheless, we are concerned this value will either be destroyed or become unavailable to minority shareholders if these corporate governance risks materialise."

Time will tell whether Sibal wants to consolidate the auto industry, but it already is consolidating the aluminium industry. The company forms half of a new group named Russky Alyuminiy, the other half comprising aluminium assets of oil-producer OAO Sibneft. This alliance brings together several controversial and influential businessmen of the 1990s, known as 'oligarchs', including Roman Abramovich and Boris Berezovsky. Russky Alyuminiy is the world's third-largest aluminium producer with annual output of 2.15m tonnes, and it controls over 60% of output from Russia, according to Polina Lauchlan, senior associate editor of Metal Bulletin in London.

Upsetting other investors?

If GAZ falls to Sibal, other projects to make cars in Russia could suffer.

Fiat may rethink its commitment to NM. At least, the project may face further delay, as the Italians would need time to get to know the new owners of their partner GAZ.

The implications are unclear for the biggest foreign project to build cars there - a $500m-$600m plan between General Motors Corp and Lada-maker AO AvtoVAZ.

AvtoVAZ-GM Venture
NAME undecided
SITE Togliatti (1,000km southeast of Moscow)
.. 43% General Motors
... 14% EBRD
INVESTMENT $500m - $600m
START Q4 2002
CAPACITY 75,000-90,000 units / year in 2 shifts (target 2006)
PRODUCTS Lada Niva 2123, maybe Opel Astra T3000
(badged Chevrolet. model names may change)
WORKFORCE 1,200 in 2 shifts at capacity
SOURCE just-auto.com

The issue is complex because GM owns 20% of Fiat, which in turn owns 5% of the US automaker. Each company wants to make similar-sized vehicles in Russia, and both have discussed consolidating plans to build cars there in a single venture. This idea has been scuttled, but it could be revived if Fiat or GM would face complications with its local partner, as the Italians may with GAZ. The US automaker is expected to decide on December 5 whether to approve the AvtoVAZ deal, but it may postpone any action, if uncertainty continues to surround GAZ.

EBRD is expected to play a big role in the AvtoVAZ-GM deal, perhaps lending $170m and taking 14% of the equity. (Each automaker would hold 43%.) Disappointing experiences in Russia with GAZ plus truckmaker AO KamAZ could lead the bank to conclude that auto projects there have become too risky to undertake. Or EBRD may feel a special imperative to back an AvtoVAZ-GM project to show successful ventures in autos in Russia are still possible. (In the mid-1990s, EBRD lent $20m to GAZ, repaid without a hitch.)

"If EBRD gets screwed over GAZ, I would not expect to see big loans flowing into Russian industry from Europe for a long time," an executive of a foreign parts maker in Moscow said.

Sibirsky Alyuminiy may not care.

Contact Ryan James Tutak, associate editor of just-auto.com for Eastern Europe:
E rjt@pronet.hu
F +36-1 / 317-7257
T +36-1 / 266-2693