Metinvest Merges with Smart Group

Yesterday Metinvest announced it will merge with Smart Group. According to the press release, Smart Group will transfer its metallurgy assets Inguletsky Iron Ore (IGOK: N/R), Makiyivka Steel Plant and Bulgarian rolling mill Promet Steel to Metinvest in exchange for a minority stake in the new joint holding. Metinvest said it expects the deal to be completed by the end of 2007. Additionally Metinvest representatives said that the merger would have no affect on the company’s IPO plans.  Eugene Cherviachenko: The news meets our expectations of a merger between these holdings (see our June 2007 report). In our opinion, the merger will positively affect Metinvest-related companies (Enakievo Steel (ENMZ: U/R); Azovstal (AZST: BUY); and Avdiyivka Coke (AVDK: BUY)) by strengthening their market position and creating synergies. A 44.4% stake in Pivdenny Iron Ore (PGZK: U/R), which is owned by Smart Group, was not included in the holding. We believe Metinvest will try to buy a stake of 47.9% from Privat in the short-term. However, it is possible that Privat, which unexpectedly cleaned up the financials of its steel assets in 1H07 will probably sell all its metallurgy assets (iron ore, coke, steel and pipes) as one block to a major CIS player in the mid-term. Under either scenario, Pivdenny Iron Ore’s long-term prospects are favorable.