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ALROSA’s free float at the crossroads

16 march 2012

For over a year the market has been waiting for definite actions on floating some of ALROSA’s stock being curious about what amount of shareholding will be sold, at what time and in what manner. Probably because of the long wait, mass media is now getting impatient about the results of the company’s Supervisory Board meeting to be held on March 16. Earlier it was reported that this meeting may dwell on the stock privatization issue.

However, no one should think that the meeting on March 16 will bring about some fundamental change. To make the free float possible the company will need to have a directive issued by the government of the Russian Federation and not the decision taken by the Supervisory Board – this is what will determine the pattern of stock sale and kick it off. By its function, the Board of Directors may only hear the position of ALROSA’s management on this issue and either to recognize or not a particular pattern of privatization feasible, as well as get briefed on the "technicalities" of a possible placement.

The position of the ALROSA management today is not a secret: earlier, the company representatives have repeatedly stated that they consider expedient the sale of 7% of the shares from the state-owned stake and 7% from the stake owned by Yakutia. Judging by recent media reports, this option is supported not only by the management of ALROSA, but by the Russian Federation Ministry of Economic Development - Alexey Uvarov, Department Director at the Ministry of Property Relations, has repeatedly pointed this out. It was planned to implement such a pattern in 2012-2013.

Theoretically, it is possible to pursue another free float version: last August, Igor Shuvalov, First Deputy Prime Minister, submitted to the President a proposal for a full withdrawal of the Russian Federation from ALROSA’s capital by 2017. In this case, the State would retain a "golden share" and invest the proceeds from the sale of its stake in the infrastructure of Yakutia.

This option looks attractive because the State may get more funds for selling its entire stake than for selling some part of it. Based on the current stock price of the company (as well as on estimates made by investment banks), if sold the 14-percent stake would bring about $1 billion. By similar arithmetic, selling a 51-percent stake would give about $3.6 billion.

Of course, by selling a whole 51-percent block of shares, it is possible to get more than $3.6 billion: the premium for control would be very substantial. But this raises several questions at once. The foremost among them is who would become the buyer of such a stake? There are no analogues of ALROSA among the Russian mining companies - it is the only major company engaged in the diamond business. Therefore, any potential Russian customer will be forced either to learn all the intricacies of this business from the scratch or rather remain a "financial investor" having a de facto control over the company.  There are companies with extensive experience in the diamond business overseas, but to give control over the world's largest diamond mining company to competitors would have been strange.

In addition, the hypothetical possibility of selling the 51-percent stake as a whole would be contrary to the company policy now pursued to improve the transparency and investment attractiveness. Replacing one single large shareholder by another would not increase the number of private investors: free float in this case will remain low. In this case, the transformation of ALROSA into an open joint stock corporation from a closed joint stock entity carried out last year would have proved totally useless.

Judging by media reports, the pattern aimed at privatizing the entire state-owned block of shares does not find support among advising investment banks: in their opinion, a total withdrawal of the Russian Federation from the company's capital will result in the need for early redemption of Eurobonds in the amount of $1 billion (issued in 2010 for a period of up to 2020) that will affect performance of ALROSA, including significantly slowed down investments. And this will ultimately result in a negative impact on the development of Yakutia.

Yakutia has also failed to support the exit of the Russian Federation from ALROSA: Yegor Borisov, President of the Republic of Sakha (Yakutia), has stated that Yakutia insists on maintaining state control over the company. This shareholder is worried about how ALROSA will perform its social functions: for Yakutia, the diamond miner is a budget contributor and a socially important enterprise. So, if it belongs to the State this guarantees the company will pursue a responsible social policy, while social responsibility of private owners is apparently called in question.

In addition, it is undeniable that during the crisis period the model in which the State was the main shareholder proved its effectiveness. It is not known whether the company would have received government support (being given an opportunity to sell rough diamonds to Gokhran), if it were private. The State as a shareholder is also a guarantee of stability for investors and crediting banks.

Advising banks are now speaking in favor of the 7% + 7% pattern. According to them, to float a smaller stock does not make sense, since the company would need a placement volume of about $1 billion to have a successful IPO on the stock exchange. At the same time, placing a 14-percent stake will significantly increase the free-float. Currently, "private" shareholders have about 9% in ALROSA, but in reality only a small portion of these securities are being traded on the stock exchange: these shares are owned either by some foundations or ALROSA’s staff who got them many years ago under an option plan. If sufficient amount of shares will emerge on the stock exchange, this will significantly increase the capitalization of the company.

Elena Levina for Rough&Polished