Work in Progress – Sibur/Amtel Debt Deal in the Offing

When the ink is dry on any such deal, it will mark the end of almost four years in which the company grew rapidly – too rapidly, as it turned out – in the Russian market, and collected massive debts along the way. Amtel Group subsidiary Amtel Holdings Holland NV originally acquired Vredestein Banden BV for 195.6 million euros in April 2005. At this time the Russian company controlled, according to a statement released by Alfa Bank, 30 per cent of tyre production in Russia. Amtel operated five tyre factories plus a carbon black and nylon fibre plant. Its cash purchase of Vredestein Banden BV, itself a long established manufacturer with an annual output of 4.3 million tyres, was intended to give Amtel a foothold in Russia’s premium tyre market. In line with this plan, the newly combined Amtel-Vredestein began selling Vredestein brand tyres in Russia in mid-2005, and were able to glean 150 per cent more profit from tyres sold under the Dutch trademark than from its own brand.

The 2005 acquisition of Vredestein Banden BV was followed by investment in retail stores across Russia. The first opened the same year, and by 2007 the company operated 92 AV-TO outlets throughout the country, making it Russia’s largest tyre retail and distribution entity. In July 2006 the company made another purchase – this time the Moscow Tyre Plant, a Soviet-era facility where the ‘Taganka’ tyre brand was manufactured. After a year in new hands the facility held capacity for 850,000 A segment passenger car and light truck tyres per annum, and 1,150,000 B and C-segment passenger car tyres. All capacity for a bright future – at the time of the combined Amtel-Vredestein’s creation, Alfa Bank analysts estimated that the Russian tyre market would grow 10 to 15 per cent per annum, and borrowing to expand seemed like a reasonably safe risk for such a major player.

After a year’s efforts, an agreement between Sibur Group and Amtel-Vredestein finally seems in the bag

The reality, as is often the case, proved otherwise. After reporting a net loss of US$5 million for the 2006 year, expected due to the level of investment undertaken by the company, CEO Alexi Gurin said he expected the company to be profitable in 2007. Net loss during this year, however, skyrocketed to $242 million, despite a 22 per cent increase in sales. Upon announcing the company’s 2007 annual results, Supervisory Board chairman Rafeal Nagapetyants told shareholders the sober truth: “2007 was one of the most difficult years in the history of Amtel-Vredestein N.V. It was a year in which the company’s growth was superseded by two fundamental weaknesses: our huge debt incurred to finance the expansion of previous years, and our resulting inability to adjust structural costs in line with global market volatility. The challenges faced in 2007 – over-capacity, rising costs, growing competition – intensified and significantly weakened our business.”

To counter its debt, Amtel-Vredestein disposed of the Moscow Tyre Plant for $77 million in March 2008 and put a freeze on expanding its loss generating AV-TO network. Work on the company’s Voronezh II facility was also put on hold. Yet these measures were not enough. In January 2008 the company entered into preliminary discussions with Sibur Holding regarding a possible combination with its SRT business unit. The following month, following a week in which Amtel-Vredestein could not provide its Amtel-Povolzhye factory with the raw materials required for production, the company signed a raw materials supply contract with SRT and was required to make use of a $25 million Alfa Bank credit line. SRT, however, indicated it would not progress towards a more comprehensive agreement until Amtel-Vredestein’s debts were restructured. By June the two companies appeared to have reached an agreement.

Russia’s Federal Antimonopoly Service was handed details of a reverse takeover arrangement, whereby Sibur Holding would first sell its SRT business to Amtel-Vredestein and then acquire the majority of all outstanding Amtel-Vredestein shares. This move would have effectively given Sibur Holding 100 per cent control of its competitor and a business registered with the London Stock Exchange. Amtel-Vredestein, however, could not meet the financial terms of the deal before the agreed September 30 cutoff date, and the deal was terminated automatically.

On that day Amtel-Vredestein’s press department reassured Tyres & Accessories that the deal was an “ongoing work in progress.” Problems for Amtel-Vredestein continued, and in October 2008 production at the Amtel-Povolzhye again stopped due to a lack of working capital. Production did not recommence until December 8. That same month the company announced what was already clear to see – its Russian OJSC Amtel-Vredestein business couldn’t satisfy creditors’ demands.

Therefore, the company’s more financially viable Dutch subsidiary, Vredestein Banden B.V., was to be disposed of in order to pave the way for the Russian operation to be dealt with separately. Finally, in late January this year a solution to the Sibur/Amtel-Vredestein issue was again making news. The Sibur Group stated its interest in buying $600 million of Amtel-Vredestein’s $800 million debt (the remainder belongs to the Dutch side of operations and therefore not relevant to Sibur). Negotiations are still ongoing at the time of writing, however should all go to plan – at last – the tyre producing entity that emerges should have annual sales of approximately $2 billion and be a dominant force in Russia and the CIS region.