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Canadian Magna outlines Russian venture

Deals

Magna International Inc. chairman Frank Stronach rejected several privatization proposals put to him last year before hooking up with controversial Russian oligarch Oleg Deripaska in a deal that involves Stronach surrendering sole control of the Canadian auto parts giant he founded 50 years ago.

The proposals came in the midst of negotiations with Deripaska that began in March, 2006, and included a privatization plan from the Russian billionaire himself, which was also rejected, according to the management circular for the August 28 meeting, where shareholders will be asked to approve a transaction with Deripaska’s company Russian Machines. The deal will maintain Magna as a public company. “Mr. Stronach rejected such proposals for a variety of reasons, including governance, preservation of the Magna principles, maintaining Magna’s competitive profile and, in particular, concerns about taking on any significant financial leverage,” says the circular, which was filed with securities regulators yesterday.

The circular outlines the rationale for the deal, under which the 39-year-old Russian billionaire will pay $1.54 billion to buy 20 million class A subordinate voting Magna shares. That will give him an equal stake with Stronach in a holding company that controls Magna. In addition, the document reveals that Magna’s two co-CEO, Don Walker and Siegfried Wolf, and three other senior executives will receive pay increases, and Belinda Stronach will rejoin the company’s board as one of four new directors.

The Russian government could also end up as a minority shareholder in the parts maker under certain circumstances, the circular said. The deal came about as Magna was searching for ways to grow in emerging markets as sales in its traditional markets of North America and Western Europe stagnated and its largest customers lost market share. Russia is a growing market with a growing middle class and its vehicle manufacturers - including GAZ Group, which is controlled by Russian Machines - need modern technology and manufacturing expertise that Magna possesses, the circular says. Magna also thinks it makes the most sense to hook up with a partner to enter a market relatively unknown to it.

But there are risks to doing business in Russia, the circular acknowledges. “The unstable political climate and ongoing political trends in Russia could have an adverse effect on Magna’s proposed investments, earnings and financial condition to the extent derived from or relating to its Russian strategy,” the document says. In addition, the Russian government is making an effort to control key industries, which may mean the nationalization of some enterprises. If that were to happen, the circular notes, the Russian government could indirectly become a minority shareholder of Magna.

The problems of doing business in Russia were illustrated earlier this week when Mikhail Gutseriyev, billionaire CEO of oil company OAO Russneft, said he is leaving the company and selling his majority stake, blaming persecution from authorities. He later recanted the persecution statement, but the beneficiary of his departure appears to be Deripaska, who is one of Russia’s richest men and controls an empire that runs from autos, to energy and aluminum. Despite those riches, however, Deripaska does not have permission to enter the United States, the circular confirms. Deripaska was asked in 2006 to refrain voluntarily from entering that country and found out later that his visa had been revoked, although he has never been told why, the circular says. Various media reports this spring said the US government is concerned about potential links between the Russian magnate and organized crime in that country. Deripaska has dismissed such charges as propaganda.

Shareholders have privately criticized the deal with Deripaska and some have publicly called for Magna to use the $1.54 billion in proceeds to pay a special dividend. That suggestion has been made by Pzena Investment Management LLC of New York, which is Magna’s second-largest shareholder and just led a successful battle against corporate raider Carl Icahn, who was attempting to take over Lear Corp., a major competitor of Magna in the automotive interiors business. Some details that might have helped Magna win shareholder approval were left out of the document, including at what price Magna will buy back shares after the transaction is complete. More details will be issued on that before the meeting. The circular also reveals that despite hooking up with Deripaska, Magna so far has signed no contracts to supply parts to GAZ or Russian Machines and no agreement to identify opportunities in Russia. (theglobeandmail.com)

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