Norilsk Nickel shares jump on FAS approval bypass

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Norilsk Nickel shares jumped on Thursday morning after the company revealed that its share buyback plans would not require approval from the Federal Anti-Monopoly Service, with subsidiaries not taking a greater than 10% stake in the company.

The company will use a mechanism to implement the share buyback which avoids the need for FAS approval in circumstances where foreign investment exceeds 10% in strategic Russian companies.

Norilsk Nickel is using a subsidiary, NN Investment, to buy 7.71% of Norilsk Nickel shares, with 9.23% of its shares acquired in another buyback from earlier this year, held by another subsidiary Corbierre Holdings, which is registered in Nevis, in the West Indies. Norilsk Nickel says Corbierre Holdings is an indirect subsidiary rather than a direct subsidiary, and added that the requirement for approval of the deal by the government commission only applies "where a foreign investor or a group of persons already has or will as a result of consummation of a transaction have a right to dispose of 10% or more of the voting shares in the strategic subsoil user.”

In a statement released on its website Norilsk Nickel said that the share buyback announced in late September would not violate the law while also noting that there are proposals before the Duma to increase the foreign investment in strategic companies limits to 25%.

“The Company believes that completion of the offer to purchase announced on September 28, 2011 (the "Offer") will not violate the Strategic Investment Law and does not intend to, and will not, acquire and hold 10 per cent or more of the voting shares in Norilsk Nickel as a result of the Offer.”

The statement comes after FAS Igor Artemyev sent a letter to Norilsk Nickel CEO Vladimir Strzhalkovsky and shareholders warning that the buyback could be declared void because it might violate the law on foreign investment.

However the company will need to gain approval from the FAS, if a current review by the government body, determines that the relationship between key shareholder Interros and Norilsk is so close that they constitute a single group of companies.

Troika Dialog analysts Mikhail Stiskin, Irina Lapshina, Zaurbek Zhunisov, Anton Rumyantsev, and Stanislav Ermakov noted in a brief on Wednesday evening that the issue could lead to significant delays or even cancellation of the buyback.

Given the regulatory hurdles, there is a chance that the buyback could be postponed or even scrapped in the worst case – recall the buyback from 2008 that was suspended under a Krasnoyarsk court decision, with all tendered shares being frozen for several months.

The Troika Dialog analysts added that they thought it likely Norilsk Nickel would use a repo mechanism to temporarily get around the FAS requirement, but with the link to Interros which is believed to hold a 25% plus stake in Norilks Nickel, still an issue to address.

“The company does not expect its holding in treasury shares to exceed the 10% threshold. To achieve this, we expect it will repo its existing 9.2% treasury shares, temporarily removing the legal title over the stock. However, we do not think this addresses the FAS' concerns, as the treasury shares are pooled with Interros' 25-30% stake under the service's interpretation.”

Investcafe analyst Pavel Emelyantsev also notes the key issue is the relationship between Norilsk Nickel and Interros, adding that what the FAS could determine poses risks to Norilsk Nickel investors.

“From the point of view of law Norilsk Nickel has really bypassed one point, having begun to take applications for the buyback, without having received permission from the Governmental commission. However, it will be safe only in the event that FAS will manage to prove that Norilsk Nickel makes common cause with the majority shareholder, Interros. While the buyback can be postponed for a long enough period of time because of trials. It leads to higher risks for investors and lower investment attractiveness of the Companys’ shares.”