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Aluminum Deal to Create World's Biggest Producer

Russia's Rusal is buying rival Sual and assets of a Swiss trading firm in an acquisition that would supplant Alcoa.

October 10, 2006|From the Associated Press

MOSCOW — Russia's Rusal is buying Russian rival Sual and acquiring some assets of a Swiss commodities trading firm in a three-way deal that will create the world's biggest aluminum producer, dethroning U.S.-based Alcoa Inc.

The announcement Monday by Rusal, which is controlled by Russian billionaire Oleg Deripaska, underscores the rise of Russia's commodities-based industries against a backdrop of rising prices.

Under the terms of the agreement, privately held Rusal would issue new shares to acquire rival aluminum producer Sual as well as the Jamaican, Irish and Italian alumina assets of Swiss-based commodities trading firm Glencore International.

Sual and Glencore would hold 22% and 12% stakes, respectively, in the new company, Sual Chairman Viktor Vekselberg said. The deal requires regulatory approval in Russia and the European Union.

Vekselberg said he expected the new company to carry out an initial public offering of stock in less than 18 months, probably in London.

The expanded Rusal would control 12% of the world's primary aluminum, producing nearly 4 million tons a year and eclipsing the 3.55 million tons that Alcoa reported in 2005.

Rusal director Alexander Bulygin estimated that the value of the combined company would be $25 billion to $30 billion and said it expected annual revenue of $10 billion.

Under the terms of the agreement, Bulygin would become the new company's chief executive. The company would have an 11-member board including six representatives of Rusal, two from Sual, one from Glencore and two independent directors. It would have 110,000 employees and would operate in 17 countries around the world.

"There are a number of challenges that lie ahead. The deal has to be approved by the various regulatory bodies, and that always takes a bit of time. There are hurdles that you have to get across," said Sual President Brian Gilbertson, who would be board chairman at the new Rusal.

Russian regulatory approval is expected to be a formality -- both Deripaska and Vekselberg met recently with President Vladimir Putin, and analysts say they have good relationships with the Kremlin.

The jailing of oil tycoon Mikhail Khodorkovsky, who sponsored opposition parties in 2003, and the breakup of his Yukos oil empire have shown the potential consequences for moguls whose politics or business plans run counter to the Kremlin's.

Analysts have said that the companies in the aluminum deal complement each other: Sual has large holdings of bauxite, aluminum's raw material. Rusal, meanwhile, has the biggest smelters and access to cheap electricity -- the main cost in the business and its chief competitive advantage on the world stage. As such, the deal essentially reunites Russia's aluminum industry after its breakup in the chaotic privatizations of the 1990s that followed the Soviet Union's collapse.

Although the deal involves two privately held Russian companies -- unlike the oil and gas industry, in which the state still controls the main companies -- observers said that it nonetheless was in keeping with Putin's vision for the economy.

"With the extractive industries, the Kremlin clearly favors consolidation and for Russian companies to become bigger global players," said Chris Weafer, chief strategist for Alfa Bank in Moscow. "That allows Russia to enjoy the economic benefits of size and also gives the Kremlin political leverage."

As well as creating a formidable global player, the deal realizes a goal of Deripaska, who worked with billionaire soccer club owner Roman Abramovich to create Rusal in 2000. Abramovich has since sold his share.

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