OAO GAZ, Russia’s second-largest automaker, succumbed helplessly last month to stealthy attacks of a corporate raider. But a more alarming prospect looms: its compatriot AO AvtoVAZ, the biggest car producer across Eastern Europe, may face similar takeover threats.

The fate of AvtoVAZ’s ownership is crucial now.

GM still cautious

General Motors Corp has been on the verge of approving an innovative venture with AvtoVAZ for months, but fears of commercial and political risks in Russia still prevail, and investment plans have been stripped from $500m-$600m for making two models to $350m-$450m for making one model. GM’s board of directors has deferred a decision on the project from October 3 to December 5 – and now to February 6.

GM officials declined to comment for this story. Sources close to the US automaker said it was unmoved by reports of impending upheavals at AvtoVAZ, believing any changes in control of the Russian company would not alter prospects for the joint venture.

But some observers feel an AvtoVAZ-GM deal could collapse, if ground beneath the Russian company shifts significantly.

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To grasp AvtoVAZ’s exposure to hostile bids, consider the way a predator wrested power from GAZ.

Through a series of murky transactions apparently begun in August, OAO Sibirsky Alyuminiy (SibAl) amassed a stake in GAZ eclipsing the key threshold of 25% plus one share – enough equity to veto strategic votes at stockholder meetings. Observers believe the metals group could hold 30%-50% of the automaker’s shares, but an exact percent is not known publicly, due to limited requirements for transparency in business deals in Russia.

SibAl, flush with cash from a boom in aluminium prices, has not divulged its outlay for GAZ. But auto analysts estimate $50m-$70m was paid for 25% of the producer of Volga cars and GAZelle commercial vehicles. A bargain – given GAZ posted $986m net sales and produced 239,711 vehicles in 1999, according to United Financial Group (UFG), a brokerage in Moscow. (The automaker spent $80m alone on a paint shop, opened this year with capacity for 150,000 cars in three shifts.)

Inequity in equities

But GAZ may look outrageously overvalued, compared to AvtoVAZ, which rolled in $1.9bn revenue and rolled out 677,687 vehicles last year, according to Alfa-Bank in Moscow.

AvtoVAZ, originally called VAZ for Volzhsky Avtomobilny Zavod (Volga Auto Factory), is based nearly 1,000km southeast of Moscow in Tolyatti. The city, home to 721,000 people, was founded in 1737 as Stavropol, then renamed in 1964 to honour Palmiro Togliatti, co-founder and leader of Italy’s Communist Party 1944-1964. Fiat SpA provided the turnkey plant for VAZ to start building cars under brands Lada and Zhiguli in 1970.

AvtoVAZ’s main factory, now able to make a maximum 750,000 vehicles a year, plans 741,000 in 2000 and 752,500 in 2001. (Output was 529,577 this year through September.)

Despite this industrial might, an ordinary share of AvtoVAZ is worth less than a pint of cheap vodka, trading below $2 last week. The price touched $0.09 in June 1999. (GAZ stock, fetching $27-$52 the past six months, has circulated around $30 last week.)

“AvtoVAZ’s current market valuation is discounted 87% to its fundamental value, which may attract a strategic investor…,” Eugene Satskov, an auto analyst at Renaissance Capital in Moscow, stated on November 20 in a brief upgrading his recommendation of the automaker’s shares to ‘buy’. “We estimate AvtoVAZ’s fundamental value at $15.42 per share…, which implies 690%… upside potential to its current market price.”

Theoretically, a 25% stake in AvtoVAZ would command $12.5m, under half the $27.5m once sought by movie star Sylvester Stallone for his mansion in Miami. (The actor settled for $16.2m in December 1999.)

“It is cheap,” Julia Zhdanova, auto analyst at UFG, told just-auto.com.

“But, if a strategic investor would buy big blocks of AvtoVAZ shares from brokerages or key stockholders, it probably would pay a high premium on traded prices,” Zhdanova added. “An investor could acquire a stake secretly from the market, like SibAl did with GAZ. But it would be difficult, perhaps impossible, to accumulate 25% on the open market, given the low liquidity.”

Yet the possibility to purchase AvtoVAZ’s shares, however inexpensive, depends on their availability. The amount of stock freely traded is a fundamental unknown, and estimates vary widely: 5%-25% (Zhdanova); 10% (Alexander Agibalov, auto analyst at Aton Capital Group in Moscow); and as much as 40% (Maxim Matveev, auto analyst at Alfa-Bank).

Black hole of info

This disparity reflects a dearth of information. Like GAZ, AvtoVAZ issues financial reports quarterly, but regulations require disclosure of the identity and stake of only select stockholders – owners of 5% or more of the equity.

Moreover, only direct investors are named. Indirect investors, exercising ownership through agents or nominees, are not listed; only nominees appear.

Inferences about agents are difficult: one nominee may represent multiple owners; and a nominee of a package of shares may stay the same, even when an owner of all or some of that stock switches. (So potential for plots, and speculation about them, is rife.)

Amid SibAl’s assault on GAZ, the automaker could not confirm the scale or the source of strikes on its shares. Even when the metals group declared it had captured 25% of GAZ on November 15, the automaker was incapable of verifying the claim – because the acquisition had occurred surreptitiously.

VAZ vulnerable to ambush?

A covert attack against AvtoVAZ seems a disturbing prospect. The company has 200,000 shareholders, double the number of owners of GAZ, according to Agibalov. So any bidders for the Lada producer would have more possibilities to gobble stakes of small investors. (SibAl preferred to buy equity in GAZ from big stockholders.)

But, Agibalov added, a takeover of AvtoVAZ would be tough because company management already holds over half the shares, not the case at pre-SibAled GAZ (owned only 10%-15% by executives, 20% by workers).

Moreover, cross-shareholdings involving AvtoVAZ seem to tighten management’s grip on the automaker. The company’s biggest owner with a 33.2% stake is OAO AVVA (Avtomobilny Vserossiysky Aliyans or Automobile All-Russian Alliance). In turn, the Lada producer holds 80.8% of AVVA.

Plus AvtoVAZ management controls ZAO Avtomobilnaya Finansovaya Korporatciya (Automobile Finance Corp), the manufacturer’s second-largest shareholder with a 19.2% stake.

Enter SOK

Management may be AvtoVAZ’s best bulwark against a takeover. But the leadership’s push to restructure operations, including outsourcing initiatives, ironically may be enabling a favoured partner, SOK Group, to accumulate enough power to influence the automaker.

SOK, a diversified enterprise based 60km southeast of Togliatti in Samara, bottles mineral water, constructs buildings, produces medical equipment and plastic windows and runs entertainment centres. Most curious, though, is its work with AvtoVAZ. (SOK is an acronym in Russian for Samara Window Co; ‘sok’ also is Russian for ‘juice’.)

Dealer wheeler

SOK began in the car business in the mid-1990s by selling Ladas, and it is now AvtoVAZ’s largest retailer, said Nikolai Lyachenkov, the automaker’s first vice president and first deputy general director. As AvtoVAZ enjoys 60%-65% of demand for new vehicles in Russia, SOK may be the biggest dealer there.

“SOK is easily the biggest Lada retailer, and it has the largest network of dealers,” an AVVA director told just-auto.com in August.

As SOK sells vehicles from different sources, estimates of its turnover vary. SOK orders roughly 8,000 vehicles a year from AvtoVAZ’s main plant, Lyachenkov said. But SOK sells nearly 40,000 a year, including Ladas that SOK assembles, according to a municipal official in Tolyatti.

SOKing up suppliers

In parallel, SOK is quickly amassing a formidable portfolio of auto-parts makers. Over the past two years, it has acquired control of equity or management of key suppliers, including OAO Dimitrovgradsky Avtoagregatny Zavod (DAAZ), OAO Osvar, OAO Plastik, OAO Syzranselmash, OOO Zavod Avtopribor and OAO Zavod Avtosvet.

According to auto analysts in Moscow, SOK is now the main supplier to AvtoVAZ of: clusters of gauges for instrument panels (via Avtopribor); headlamps and other lights (via Avtosvet, DAAZ and Osvar); and many plastic parts (via Plastik).

DAAZ (annual revenue reportedly near $2bn) and Plastik, described to be AvtoVAZ’s largest suppliers, together are believed to produce over half the automaker’s parts made off the auto factory’s premises.

“SOK is the biggest supplier of plastic parts to AvtoVAZ,” Lyachenkov said.

3-D

SOK, then, appears to be gaining influence at opposite ends of AvtoVAZ’s operations – supply side (parts production) and demand side (car distribution).

A third dimension to its role with the Lada producer may be growing. SOK apparently sees opportunities to help with capacity limitations at AvtoVAZ’s main plant. The automaker cannot afford to add assembly lines, and it needs space for current and future models. But older generations of vehicles remain popular, so AvtoVAZ wants to continue their output elsewhere. SOK controls important sites available for this function – DOAO Izhmash-Avto and ZAO RosLada.

Armed for expansion

The easternmost place for car production in Europe, Izhmash-Avto remains majority owned by OAO Izhmash, an industrial conglomerate 1,325km outside Moscow in Izhevsk. Izhmash is the biggest maker of motorcycles in the former Soviet Union – and the main producer of AK Kalashnikov assault rifles. But SOK secured management control of Izhmash-Avto in March 2000, and it has big plans there.

SOK reportedly wants Izhmash-Avto to assume production of several models now made by AvtoVAZ, including 2104 station wagon, 2105 sedan, 2107 sedan and Niva 2121 off-road vehicle. Izhmash-Avto already has assembled a trial batch of 2121. (A modern version of Niva, code-named 2123, would be built in the AvtoVAZ-GM venture under the US automaker’s badge Chevrolet.)

Lada Niva 2123

Izhmash-Avto has been in talks to launch serial production of Niva, said Mikhail Blokhin, the company’s director. AvtoVAZ has not ruled out sourcing output of its vehicles at Izhmash-Avto, but no plans have been agreed for 2001, Lyachenkov said.

Besides plans for AvtoVAZ models at Izhmash-Avto, SOK aims to revitalise Izh-brand vehicles. Output of these collapsed from 180,823 in 1990 to 15,004 in 1999. The Izhevsk plant forecast production of 20,000-25,000 in 2000 and 55,000-60,000 in 2001. (Izhmash-Avto made 7,205 cars and 10,393 pickups this year through September.)

“We plan to increase annual capacity at Izhmash-Avto to 210,000-220,000,” Blokhin said, adding the factory would start to operate profitably once output reaches 4,000 per month.

[Skoda Auto as, the Czech unit of Volkswagen AG, has talked for three years about building its vehicles at Izhmash-Avto, even outlining a $250m venture for 100,000 cars a year, named Skoda Auto Udmurtia (owned 75% by Skoda, 25% by Izhmash). But, since the economic collapse of Russia in August 1998, all foreign plans for car production there have been delayed, and both parties to this programme see no possibilities to begin cooperation in the short-term.]

RosLada assembles two models out of kits from AvtoVAZ: 2106 (a rear-wheel-drive sedan) and Samara 21093 (a front-wheel-drive five-door hatchback). Output approached 25,000 in 1999, and capacity is installed for 100,000 a year. The volume this year through September totalled 24,259.

“RosLada has strong prospects, and it is expanding to include welding and painting operations,” said Blokhin, the head of RosLada before transferring to Izhmash-Avto.

SOK up to snuff

The rise of SOK in the auto sector in Russia has impressed professionals, believing the company can play an important role in modernising the industry. Generally, manufacturers of parts and vehicles there have been suffering from accumulating debt, ageing equipment and mismanagement. SOK is credited with reviving Izhmash-Avto and suppliers, by deploying capital and technology as well as seasoned executives and engineers.

“SOK is a positive force,” said a senior official at OAO Borsky Stekolny Zavod of Bor, the biggest maker of auto glass in ex-USSR. “They have a solid team of technical specialists, and they are elevating the work of several suppliers to higher levels.”

Anatoly Kriazev, chief engineer at Plastik, said SOK is investing heavily to improve operations. “SOK is revamping our facilities plus our capacity to design and develop products,” he said. “As examples, SOK has bought water-jet lines to cut trim for door panels and roof liners, and another line has been installed for mixing chemicals and fibres.”

Praise for SOK has come from heads of automakers. At the Moscow motor show in August, GAZ president Nikolai Pugin replied to a question about the impact of SOK: “It is good Russian entrepreneurs with money are investing to develop the auto industry. The initiatives are needed. If they have strategies to modernise components production with foreign suppliers in Russia, we will support them.”

AOOT Ulyanovsky Avtomobilny Zavod (UAZ), a maker of off-road vehicles and vans, even was considering selling stock to SOK, UAZ general director Pavel Lezhankin said at the show. But this may be no longer true. OAO Severstal, Russia’s biggest integrated steel producer, reportedly bought over 20% of UAZ’s shares in October to become the automaker’s biggest owner.

The big question

SOK has not publicised its long-term intentions, and its management could not be reached for this story, but the company seems committed to expanding its auto assets: it reportedly is looking to buy ZiT, a maker of starter motors.

Beyond this, informed observers disagree. Some believe SOK soon will halt acquisitions, then consolidate and reorganise its array of suppliers, partly to shake out product overlaps. Others imagine SOK aims to build a deep roster of parts makers to establish a competitor to systems suppliers in developed markets – exploiting Russia’s wealth of cheap resources, skilled labour and sophisticated engineers.

A few watchers even suspect SOK may seek to leverage its burgeoning influence with AvtoVAZ into a controlling position in the automaker, given key roles that SOK already enjoys with the Lada producer in assembling and selling cars plus making parts.

However, most industry players consider this prospect far-fetched.

“Besides Kadannikov, the brass at AvtoVAZ tend to keep a low profile, but they still rank among Russia’s elite executives, and they are independent,” said an official of a foreign supplier in Russia. “SOK may be powerful with AvtoVAZ, and AvtoVAZ may find SOK highly useful, but I doubt SOK ever could impact AvtoVAZ strategy, and I think SOK ultimately plays by rules set by AvtoVAZ.”

SOK apparently owns no AvtoVAZ stock, even though shares are preciously cheap. SOK may be unable to afford a significant stake, some analysts said, suggesting SOK may be short on cash from its broad and quick expansion in the auto industry. The perception here: SOK is at the height of its clout with the Lada maker, and its role soon should stabilise – or even start to decline.

SOK + SibAl = …

If SOK would want to marshal financial force to gain further influence with AvtoVAZ, it may be able to turn to a powerful partner. SOK president Yuri Kachmazov reportedly is close to Oleg Deripaska, head of Sibirsky Alyuminiy, the metals group that upended GAZ.

Analysts doubt SibAl would bid for AvtoVAZ, arguing any investor would be deterred by the automaker’s daunting debt, nearly $1bn, according to Alfa-Bank. Moreover, the metals group may need a reprieve from a splurge in auto assets. The key purchase was GAZ (Gorkovsky Avtomobilny Zavod or Gorky Auto Factory), based 400km east of Moscow in Nizhny Novgorod, Russia’s third-biggest city (known as Gorky 1932-1991). But SibAl also has grabbed AO Pavlovsky Avtobus (PAZ), the biggest busmaker in the ex-USSR, located in Pavlovo, a city in the same region as Nizhny Novgorod.

Speculation has surfaced about SibAl expanding further in the auto industry, but this has centred on the prospect of forging a mini-empire with the potential procurement of AO Zavolzhsky Motorny Zavod (ZMZ), the main engine supplier to GAZ and PAZ. Indeed, the metals group has created a structure to manage its auto assets named Rusavtoprom. (In the mid-1990s, GAZ already was contemplating an alliance with PAZ and ZMZ.)

SibAl’s pronouncements about its intentions in the auto industry have been cunningly mixed. In August, after disclosing its annexation of PAZ, the metals group said it would seek more opportunities in the sector. In early November, at the height of rumours about it buying GAZ, SibAl denied categorically and repeatedly any interest in the automaker. In mid-November, after revealing it held 25% of GAZ, SibAl said it was keen to up its stake to “absolute control.” In late November, after securing several high-level posts at GAZ, the metals group said it would postpone plans to boost its holding in the automaker to a majority stake.

Perhaps a sign of its enduring interest in autos, SibAl last year hired as vice president Viktor Belyaev, once a senior executive at AO KamAZ, a Russian manufacturer of mini cars and heavy trucks. On November 29, Belyaev was appointed GAZ’s first vice president and general director.

…AvtoVAZ + GAZ?

SibAl could find AvtoVAZ appetising and easier to swallow with SOK as a convenient digestive.

On this scenario, SOK’s connections with AvtoVAZ could help SibAl avert management resistance, like the kind initially mounted against the metals group at GAZ. Since AvtoVAZ managers are also stockholders, the same ties could help allay any concerns of SibAl about illiquidity or unavailability of the automaker’s shares.

Any financial obstacles to buying into AvtoVAZ may seem inconsequential to SibAl, given media reports of the metals group planning to pour $1.5bn-$2bn into GAZ.

Indeed, SibAl’s shareholders (including Deripaska) form half of OAO Russky Alyuminiy (RuAl), a new conglomerate that is the world’s third-biggest producer of primary aluminium. (The other half of RuAl comprises owners of OAO Sibneft, notably ascending oligarch Roman Abramovich.)

Last week, RuAl received a $170m loan from German bank Westdeutsche Landesbank (WestLB) with $300m in syndicated credit to follow, according to Troika Dialog, a brokerage in Moscow. The funds are ostensibly for working capital, but the money is widely expected to advance SibAl’s acquisition drive.

Russky Avtomobilny Zavod?

The metals group has abruptly confronted the enormous financial troubles at GAZ, and money problems at AvtoVAZ are believed to be far worse. But SibAl may be unable to resist the lure of establishing an automotive powerhouse of AvtoVAZ, GAZ, Izhmash-Avto and PAZ. The group would boast annual output exceeding 1m vehicles (including buses, cars, pickups, small trucks and vans) – a volume surpassing Mazda Motor Corp of Japan and approaching bankrupt Daewoo Motor Co Ltd of Korea, based on 1999 results.

SibAl may be motivated partly by conviction it can provide the firm financial foundation long needed by Russian automakers to survive. An independent motor industry is highly prized in Russia, indeed everywhere, evident in fierce public support in Korea and the UK for domestic manufacturers in jeopardy.

But SibAl would not be first to hatch the idea for an auto giant in Russia. AvtoVAZ and GAZ already have expressed interest in closer relations, including consolidation of their suppliers, effectively underway with SOK, which delivers high volumes of parts to both manufacturers.

AvtoVAZ and GAZ even have contemplated rough outlines of a merger, according to an internal report of the Lada maker seen by a journalist in September.

An AvtoVAZ-GAZ union would result in little overlap in product profiles, so it could embody commercial and industrial logic. The automakers may feel stronger together, given declining import tariffs on new vehicles and growing interest of global manufacturers in building cars in Russia.

(Ironically, foreign partners of AvtoVAZ (GM) and GAZ (Fiat Auto SpA) once talked about consolidating their car-making projects in Russia, and they already have a cross-shareholding. GM owns 20% of Fiat, which owns 5% of the US automaker.)

Latest twists

The key issue of the availability of AvtoVAZ stock may have taken a new turn this month with news about the automaker’s biggest owner.

At an extraordinary meeting of its shareholders on December 1, AVVA amended its charter to change its status from an investment fund to a holding company. The move, Russian media speculate, signals AVVA is preparing to play a greater role in AvtoVAZ.

The Lada maker has been planning to reorganise its massive operations into divisions (such as car production, marketing and sales, research and development), unified under a structure that AVVA may be redefining itself to command, auto analysts said.

AVVA reportedly said its charter was modified mainly in reaction to newly-approved legislation unfavourable to businesses defined as investment funds.

The implications of changes to the charter have not been spelled out, but AVVA also could be positioning itself for a confrontation with a hostile bidder, such as SibAl or SibAl-SOK.

AVVA, now 86 staff and seven managers, was founded in 1994 by controversial tycoon Boris Berezovsky and Alexander Voloshin, now chief of staff for Russian President Vladimir Putin. Besides AvtoVAZ, AVVA’s owners reportedly include other companies co-founded by Berezovsky: Forus Holding SA (now named EM Finance Group) and AO LogoVAZ (a car dealer for AvtoVAZ and GM as well as Chrysler, Daewoo, Honda, Mercedes-Benz and Volvo).

Berezovsky no longer has formal relations with AvtoVAZ, AVVA, Forus and LogoVAZ, the companies said. Moreover, a municipal official in Tolyatti said he has not seen Berezovsky in the city over two years. But some observers believe Berezovsky maintains informal links to AvtoVAZ, and LogoVAZ deputy general director Yuli Dubov said last month he still consults Berezovsky on business decisions.

Conceived to help AvtoVAZ construct a factory and launch new models, AVVA raised roughly $50m by issuing vouchers to the public, according to the Moscow Times. But AVVA’s industrial results have been limited to assembling roughly 14,000 upgraded versions of Lada Samara hatchbacks at Valmet Automotive in Finland from November 1996 to July 1998.

AVVA has arranged for assembly of Niva in Ecuador at a site once making GM vehicles; output, launched in November, is expected to hit 5,000 in 2001 and 12,000-15,000 eventually. AVVA, also negotiating deals to build cars in Egypt and Uruguay, often spearheads AvtoVAZ’s foreign projects. It is leading talks for the Lada maker over the venture to produce new Niva in Russia with GM plus European Bank for Reconstruction and Development.

AvtoVAZ shares AVVAilable?

Confusing clues about the future of AvtoVAZ’s ownership appeared in an interview with Kadannikov published December 8 in Kommersant, a daily newspaper in Moscow. AvtoVAZ’s chair said the automaker is seeking a strategic investor foreign or Russian, and SibAl is a possibility, according to an interview summary by UFG.

“If Sibirsky Alyuminiy would invest in AvtoVAZ, this would be only welcomed,” Kadannikov reportedly said.

Any of the automaker’s main shareholders (AVVA, AFC, Russ-Invest) could sell their stock at a reasonable price, Kadannikov said, adding SibAl could buy a blocking stake of 25% in the market.

To attract an investor, AvtoVAZ may issue new shares amounting to 50% of its existing stock, Kadannikov reportedly said.

The Lada maker already issued a stake of 50% to collateralise its tax debt, under a 10-year programme agreed with the Russian state in May 1999. These shares are effectively dormant or unregistered, but the government could activate them, if AvtoVAZ would miss consecutive months of a debt-repayment schedule.

Two weeks ago, Kadannikov said the collateralised shares represented an important shield against a hostile takeover. If a predator would acquire a big position in AvtoVAZ, the automaker could stop paying arrears, and the state would actuate the 50% stake, thereby halving any holdings accumulated by a raider, he said.

But, on December 8, Kadannikov seemed open to swimming with sharks like SibAl.

What next?

To see a related article in our Knowledge Store, please follow the link below:-

https://www.just-auto.com/store/products_detail.asp?art=10374

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