The worldwide credit crunch has sideswiped the blockbuster corporate partnership between the companies of auto-parts tycoon Frank Stronach and Russian billionaire Oleg Deripaska.
Russian Machines, which Deripaska controls, revealed yesterday it had relinquished its big stake and accompanying boardroom clout in Magna to lenders who financed his $1.54 billion (U.S.) investment last year.
Basic Element, Deripaska’s investment company, said in a statement it had decided to "terminate the participation of Russian Machines as a shareholder in Magna International due to the current global financial crisis."
Industry and financial sources say many Russian companies that have spent heavily abroad in recent years now face serious squeezes because refinancing debt has become much more expensive in view of credit woes rocking the world’s financial systems.
"It’s clear he (Deripaska) was forced to sell," said one analyst who requested anonymity.
Basic Element didn’t identify any creditors. But in filings at the time of the purchase of the 20 million Magna A shares, it named BNP Paribas SA, a major bank in France, as a top lender.
Speculation swirled yesterday that institutional investors would snap up many shares because they consider Magna undervalued at current prices.
Magna’s A shares plunged $8.23 or 16 per cent at one point in trading on the Toronto Exchange after the early morning announcement, but they recovered later and closed the day at $46.32, down $2.92, or about 6 per cent. The company, which is feeling the impact of the turmoil in the North American auto industry, has lost more than half of its market value in the past year.
In disclosing the exit of Russian Machines, Magna added that the Deripaska firm will no longer be an indirect shareholder in Stronach’s lucrative European consulting company. In a side deal last year, Russian Machines invested $150 million for a 50 per cent stake in Stronach & Co. which entitled it to millions of dollars in annual consulting fees from Magna (quick payday loans).
Magna co-chief executive officer Siegfried Wolf said the company still has a good working relationship with Deripaska, Russian Machines and subsidiary GAZ Group, Russia’s second biggest auto company.
"We believe that the Russian market still holds significant opportunities for us and intend to continue to pursue joint opportunities …," Wolf said in a statement.
Tracy Fuerst, Magna’s director of corporate communications and media relations, also noted that the decision did not reflect any disagreement between Magna and the Russian interests.
"It had nothing to do with the relationships we have with Oleg, Basic Element or Russian Machines," Fuerst said.
She also said Magna’s ownership will revert to previous percentages, whereby a Stronach family trust will indirectly control the holding company that has two-thirds of the parts maker’s voting shares.
In May 2007, Magna announced that Russian Machines would buy the big stake in exchange for six of 14 seats and 42 per cent of the holding company that would control Magna.
It also meant that the Stronach trust would reduce its level of control in the new venture.
A small group of senior managers would hold the remaining interest plus two seats.
The new company would control 68 per cent of Magna although it held only 16 per cent of the equity.
Magna’s senior managers said the arrangement would bolster the company’s fortunes in Russia and other nearby countries, where emerging middle classes are increasing demand for autos.
Shareholders approved the deal a few months later although there was significant opposition.
Some minority investors, including the Ontario Teachers’ Pension Plan Board, argued there was little consideration for shareholders who held most of Magna’s equity.
Sourse