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OMZ

April 17, 2003

OMZ strategic equity investment in OAO AtomEnergoExport

April 2, 2003

 

To:                  OMZ Board of Directors

                        OMZ Shareholders

 

From:              Marc Winer,

                        Chairman, Financial Committee of the Board of Directors, OAO OMZ

                        Independent director, Board of Directors, OAO OMZ

 

Re:                  OMZ strategic equity investment in OAO AtomEnergoExport

 

Dear members of the OMZ Board of Directors and OMZ shareholders,

 

On March 24, 2003, the Financial Committee of the Board of Directors of OMZ made a decision to approve OMZ’s strategic equity investment in OAO Atomenergoexport (AEE).

 

While relatively small in size this investment is a very important step for OMZ that is expected to have a long-term effect on OMZ’s strategy, market positioning, financial strength and business development priorities.

 

The purpose of this letter is to communicate the strategic rationale for this investment. However, at this stage we would like to make it clear that OMZ is in the process of conducting a comprehensive due diligence of OAO Atomenergoexport and the company will disclose more detailed information on Atomenergoexport upon completion of the due diligence process.  In addition, OMZ has retained Ernst & Young (CIS) Ltd. (E&Y) to assess the accounting impact of this investment on OMZ’s books depending on various consolidation strategies OMZ may adopt upon completion of the due diligence process.  Therefore, we refrain from providing a detailed disclosure on the financial results and operations of Atomenergoexport as well as on the consolidation policy for AEE at this stage.  Such disclosures are tentatively scheduled for the end of May, after the completion of the E&Y and OMZ due diligence reports.

 

OMZ’s positioning before its investment in OAO Atomenergoexport

 

Prior to OMZ’s strategic equity investment in OAO Atomenergoexport, OMZ was a diversified engineering and manufacturing company with six core business segments: metallurgical equipment, mining equipment, oil drilling equipment, shipbuilding, specialty steel and nuclear power plant equipment (NPPEQ).  The latter segment was one of the largest contributors in terms of sales and profits, contributing approximately 18.5% of sales based on 2002 unaudited RAS financials.  Almost 100% of the NPPEQ segment sales could be attributed to international supply contracts, signed and managed by OAO Atomenergoexport or its subsidiary Atomstroyexport, for which OMZ was a major subcontractor.  This made the AEE group by far the largest and strategically most important customer for OMZ.

 

Due to the specifics of the worldwide nuclear power plant equipment industry, where the NPPEQ engineering, procurement, installation and commissioning contracts (EPIC) are normally handled by a single contractor, OMZ historically has had no ability to market and sell its NPPEQ equipment in any other way than through the Atomenergoexport network.

 

Atomenergoexport’s positioning before the OMZ investment

 

OAO Atomenergoexport is the successor of the formerly government-owned foreign trade organization which marketed, sold and serviced Russian civil nuclear power plant equipment and technology around the world.  OAO Atomenergoexport conducts business in over a dozen countries around the world of which China, India, Iran and some Eastern European markets, namely Slovakia and Bulgaria, are the largest markets.

 

OAO Atomenergoexport is one of the few nuclear power plant EPIC contractors in the world.  Its major competitors are GE and Framatome.  Due to Atomenergoexport’s large reference base and strategic relationship with the Russian government nuclear power agencies no Russian company involved in nuclear power plants engineering or components manufacturing can bid in international tenders for construction of nuclear power plants independently.  Instead, Atomenergoexport bids in those tenders and, if it wins, it then subcontracts manufacturing and engineering to Russian suppliers.

 

Although an EPIC contractor, specializing in trade and project management for international nuclear power plant construction and services, Atomenergoexport has no manufacturing capacity of its own and relies on engineering, equipment and components supply from third party suppliers.  This makes Atomenergoexport dependent on such subcontractors and allows for little flexibility in pricing large EPIC deals during international tenders, where competitive pricing pressure has greatly intensified in recent years.

 

The resulting business combination

 

OMZ’s strategic equity investment in Atomenergoexport is an important step towards creating a much stronger and competitive presence on the global market for nuclear power plant engineering, construction and maintenance.  By acquiring an effective ownership interest of 40% in Atomenergoexport, OMZ could coordinate the international sales and marketing efforts of Atomenergoexport, conduct a full-scale due diligence of Atomenergoexport’s operations and develop jointly with AEE a long-term strategy for further integration of both companies.  The ultimate goal of this strategic investment is to create a vertically integrated, highly profitable global player in the nuclear power plant market with a core expertise in international sales and marketing, engineering/technology and selected manufacturing, unique for the industry, within the next two-three years.

 

The resulting business combination of Atomenergoexport and OMZ is a group with combined sales in excess of $1 billion, of which over 75% is contributed by the nuclear power plant equipment/service business and over 80% are exports outside the Russian Federation.

 

Understanding the multitude of challenges associated with executing the integration strategy for Atomenergoexport, OMZ had designed a well thought out, step-by-step integration plan.

 

During the first stage, which OMZ completed by the end of March, OMZ reorganized its existing operations to focus on two major segments – nuclear power plant equipment (NPPEQ) and oil drilling equipment merged with shipbuilding into the so-called Onshore & Offshore equipment and technology segment (see OMZ Monthly Disclosure Report published in March).  At the same time, OMZ acquired Zarubezhenergoproekt to strengthen its engineering capabilities[1], and made a strategic equity investment in OAO Atomenergoexport discussed above.  Finally, OMZ strengthened its senior management team with a particular focus on the NPPEQ segment and took an active role in Atomenergoexport’s Board of Directors as of January, 2003.

 

During the second stage starting in April, 2003, OMZ will conduct a due diligence on OAO Atomenergoexport with the objective of developing a comprehensive consolidation and post-acquisition integration plan.  In addition, OMZ will realize immediate synergies from this business combination by a) optimizing our NPPEQ sales through the Atomenergoexport distribution channel, and b) identifying new sales opportunities through existing and completed contracts of Atomenergoexport. 

This stage is due to be completed by the end of May, 2003, upon the completion of the due diligence efforts of OMZ’s management and Ernst & Young (CIS) Ltd.  At that point OMZ’s Board of Directors and, subsequently, OMZ’s AGM (scheduled for end of June) would review and approve further integration plans for OAO Atomenergoexport.

 

 

About OMZ

 

For more information about OAO OMZ please go to www.omzglobal.com.

 

 

About OMZ’s Financial Committee of the Board of Directors

 

The Financial Committee of the Board of Directors (“Committee”) of OMZ was established on September 19, 2002 and is made up of two independent directors and two OMZ executives.  The committee meets monthly to review and decide on the most important financing and M&A transactions of OMZ, to ensure that the interests of OMZ shareholders are protected and to provide a structured mechanism for the assessment and execution of OMZ Board decisions relating to material financing transactions.

 

 

Sincerely Yours,

 

 

Marc Winer

 

Chairman, Financial Committee of the Board of Directors, OAO OMZ

Independent Director, Board of Directors, OAO OMZ

 

 



[1]For details on this acquisition see OMZ Monthly Disclosure Report published in March of 2003

 

 

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