Caught in a Russian downdraft

Deripaska suddenly finds himself very short of cash

Well, that was fast. When Frank Stronach sold 20 per cent of Magna International to Russian oligarch Oleg Deripaska last year for $1.5 billion, many observers fretted over what it would mean for the company in the years to come. Did Deripaska have ties to Russia’s vicious underworld? Did he get a sweetheart deal at the expense of Magna shareholders? Few thought to ask the simpler question: did he actually have the money to follow through on his end of the deal?

The answer came last week when Deripaska’s creditors forced him to give up his Magna stake. The oligarch reportedly faces billions in margin calls on other investments, a sign his high-profile acquisitions had left him highly leveraged. He had apparently pledged his Magna stake as collateral on other loans, and now he’s been forced to surrender the shares. The man who Stronach once heralded as “the most successful Russian businessman” lost at least $600 million on his Magna investment.

But if Deripaska took a bath on Magna, so too have the company’s other investors. Magna’s stock had already lost nearly 50 per cent of its value since the deal with Deripaska was struck. Last week’s news sent it down another 15 per cent, to the lowest level since 1995. The worry for investors is that Deripaska’s 20 million Magna shares will now be dumped on the open market as the oligarch’s creditors try to recoup their losses.

It’s unclear yet whether Stronach will share their grief. The deal included a $150-million payment for the company founder when Deripaska bought a 50 per cent stake in a Stronach holding company. And in past years, even when Magna’s shares were flagging, Stronach was nevertheless richly rewarded with tens of millions in fees, over the objections of shareholders.

Despite assurances that Magna had completed due diligence on Deripaska, the auto parts company apparently failed to consider all the possible risks, and to ensure its Russian partner was in for the long haul.

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