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27 Sep, 2007 07:05

Russia's biggest carmaker up for sale

Russia's largest carmaker Avtovaz may sell a stake to Aleksey Mordashov, chief of Severstal, or magnate Alisher Usmanov, who heads MetalInvest.

State-run arms trader RosOboronExport, which controls Avtovaz, says such a partnership could guarantee the supply of quality steel.

But analysts say the steelmakers would have little to gain from such a deal. 

Avtovaz is Russia's largest carmaker, controlling 70% of the country's domestic production.

But the company's market share has been falling amid rising competition from foreign producers.

“If five years ago, Avtovaz's market share was more than 50%, by the end of this year it could plunge down to 25%.  Avtovaz does not have some new bright production that could interest its customers,” said Mikhail Pak, analyst from Kapital Investment Group, Moscow.

Low prices have long been the company's major selling point.

But with Russia's economy continuing to grow for an 8th consecutive year, more and more Russians are looking to buy foreign cars.

Futhermore, the strengthening of the rouble has led to higher production costs, so a long-term contract with a steel producer could be an ideal solution to at least controlling some raw material costs.

“The key rational is to hand Avtovaz over to one of the loyal big businessmen, which could help the company survive the competition and become a major carmaker in Eastern Europe. It's all a matter of the decision of the government which businessmen will be preferred,” said kirill Chuiko, Machinery analyst from Uralsib, Moscow.

So far the choice seems to be between Severstal's Aleksey Mordashov and MetalInvest's Alisher Usmanov.

But it is not clear whether either will go for it.

“I do not see some vital necessity for Russian steelmakers to engage in such a partnership. I think the demand in Russia for steel is very high.  Avtovaz is the company that is losing its share and has no strategy on going forward. It is a really risky investment” added Mr Pak.

Both Mordashov and Usmanov have failed to confirm their plans, though analysts say Mordashov would be the more likely of the two to invest in Avtovaz.

“Maybe the acquisition of Avtovaz by Mordashov will not be such a surprising scenario, especially after he bought a stake in Power Machines. Probably he wants to invest in machinery, especially since if Avtovaz is sold to Mordashov it should not be sold at a high price” said Kirill Chuiko.

Avtovaz has a market value of $US 4bn. It is also expected to pick a foreign partner by the end of the year to help it compete. Possible contenders include Renault of France, Italy's Fiat or Canada's Magna.