International company Middlesex

International company Middlesex

Introduction

MiddleSex Holdings is a diversified international company, operating

in primary industries (steel, non-ferrous metals and energy), financial

service and agriculture. Additionally, the company has trade investment in

gold and insurance businesses. It is principally engaged in the emerging

economies of the Commonwealth of Independent States (CIS) and Central Asian

republics.

The History and Profile of MiddleSex plc.

MiddleSex was founded in 1984, and originally was a small Welsh

goldmining company called Ferromet that Mainly could be described as

defunct company with a loss about 12m by the year 1991. At that stage, the

shares of the company were about .25p in the in the wake of the disastrous

career. Then in 1992 Phil Edmonds, the former English cricketer, bought

this company and renamed it after at his countryside. But the company

didn’t involve into its present shape until 1993, when Masoud Alikhani

joined the board and reversed his Russian businesses into the company.

Since then, MiddleSex has remained committed to Russia and other CIS

countries.

Over the last four years, MiddleSex has built up an impressive asset

portfolio, developed extensive experience and knowledge of Russian industry

and its Business etiquette and expanded its network of proven contacts.

MiddleSex has secured itself a fundamental and strategic role in a number

of core industries and is now focusing on five business streams:

- Steel (and direct reduced iron);

- Non-ferrous metals (nickel);

- Financial services ;

- Energy; and

- Agribusiness.

In addition, it has trade investment in gold and insurance.

(Each of this these streams in particular I’m going to describe later on in

my research paper. )

1996 proved to be a significant year for MiddleSex, in which the

company experienced strong growth. This is particularly evident in the

metals businesses, with steel being the fastest growing activity. Moreover,

it has become apparent that nickel and the agribusiness could take on a

more significant role in the MiddleSex’s future. Other noteworthy event

include the company’s appointment to GAZPROM, the world’s largest natural

gas producer, under which MiddleSex will assist GAZPROM with its financial

strategy. (In short words : GAZPROM is considering going ahead with an

innovative financial deal whose first stage will involve issuing a

Eurobond. MiddleSex - together with Interfin Services, a Russian trade

finance house that is also involved in capital markets - will advise

GAZPROM on dealing the financiers and on strategies for fundraising. But,

again, I’m going to explain in more details later on how this alliance was

built and what particularly this alliance means for MiddleSex, because I

think that this is the very important stage of the company).

Success of every company lies in its people.

Since 1993, the main driving force behind the company has been its

Chief Executive, Masoud Alikhani. Born in Iran and educated at the Hebrew

University of Jerusalem in Israel, Mr. Alikhani’s work experience spans

from a kibbutz in Israel to agronomy in Iran and from chemicals(the US

chemicals, Du Pont) to securities business (Prudential-Bache). Alikhani was

one of the first to recognize the enormous potential of Russia and other

CIS countries. He had been trading there through his private businesses and

had a wide network of contacts since 1988.

Alikhani’s plan appeared to be ambitious at first. From a small London

base he aimed to create a group specializing in trading and finance across

a number of industries in the former Russian republics. He saw a big

opportunity to provide development finance, western management skills and

reliable sources of raw material to newly privatized countries. In October

1993, Alikhani and six Russian contacts put Ј370,000 into MiddleSex. Other

investors came up with another Ј250,000. As well as the equity, Alikhani

undertook to put enough trading through MiddleSex to earn it Ј1 million

gross profit within. Masoud Alikhani and Phil Edmonds earlier had an

agreement, once Ј 1 million in the bank, Edmonds would let Alikhani turn

MiddleSex into his own vehicle. Under the terms of Alikhani’s first deal,

MiddleSex supplied raw materials to a Tadjikistan smelter and then exported

final goods to the West. This arrangement soon turned to be very profitable

and Alikhani began haunting for new ventures.

At that time Alikhani understood that the company had changed its

image completely, and had gone to a much higher lever, so it desperately

needed a well known person with a great huge worldwide experience. Ant

that was the time when Edmonds stood down from the chairmanship and Lord

Owen turned up. A former foreign secretary and long-time European Union

peace negotiator in the troubled Balkans .Also has a deep understanding of

the mentality of the Slavic people and how to conduct business with them.

In 1996 another well known person in business has joint the company.

Fahrad Moshiri, formerly with Ernst & Young and Deloitte & Touche turned up

as Managing director in MiddleSex. He was mainly responsible for securing

the US$300m contract with OEMK (Oskol Elektro-Metallurgical Kombinat ) and

was the key in building the relationship with GAZPROM.

There many more people in the company whose personal worldwide

experience has influenced the growth of the company, but it might take me

hundreds of pages to describe the significant work they have for the

company. I have mentioned, in my opinion, three most important and most

affective people in MiddleSex. Once again, I have to say that the success

of any company, specially with a case of MiddleSex, lies in its people and

how these people effectively manage to bring their past experience into the

company.

Steel . The flagship operation.

At the beginning of 1996, MiddleSex entered into a trading agreement

with OEMK, one of the most modern and profitable steel mills in Russia, for

the export of up to US$300m of steel products per annum. As trading was

unfolding successfully, MiddleSex acquired a 7.9% interest in OEMK.

Additionally, its 40 % owned investment vehicle, Interfin, holds another

6.6% of OEMK, which gives MiddleSex a further 2.6% indirect interest.

In august 1996, MiddleSex acquired DRI (IOM) Ltd. whose sole asset was

the exclusive rights to export 40,000 metric tons per month (±10%) of

thermally passivated direct reduced iron (DRI) pellets produced by OEMK.

Direct iron reduction technology is becoming increasingly popular as it

significantly improves composition, reduces impurity contents and

consequently enhances steel quality. DRI pellets are used as replacement

for scrap material n modern electric arc furnace steel mills. Hence, in

addition to steel products, MiddleSex also controls the exports of OEMK’s

DRI pellets. DRI trading is carried out through MiddleSex’s 100% owned

subsidiary, Oskmet (DRI) Limited.

In late 1996, MiddleSex acquired WolffSteel Ltd., an established

international steel trading business, with a world-wide distribution

network of clients.

As a result, MiddleSex currently records steel profits from three

sources : OEMK export contacts, DRI exports contacts and additional

WolffSteel trading :

|Company |Gross Profit (Ј’000) |

| |1996 |1997 |1998 (est) |1999 (est) |

|OEMK export |3697 |6000 |8250 |8750 |

|Oskmet (DRI) |96 |1027 |1024 |11027 |

|Wolff Steel |242 |1200 |1200 |1200 |

|Total |4035 |8227 |10,477 |10977 |

The OEMK-MiddleSex relationship extends beyond the trading agreement.

MiddleSex monitors the day to day running of the mill, the company’s

management spends considerable time at the mill while two OEMK

representatives monitor steel trading in London on permanent basis. In

addition, OEMK has a 20 % interest in MiddleSex’s financial services arm,

Interfin. Overall, according to what I have observed, I believe that this

relationship is very strong.

Due to increasing environmental concerns and the subsequent growth of

the electric arc furnace (EAF) steel-making facilities, direct iron

reduction technology is becoming more attractive. Originally, all DRI

exports from OEMK were handled by DRI (IOM) Ltd. In August 1996 MiddleSex

bought 100% of DRI Ltd. For a maximum consideration of 2.8m and inherited a

ten year exclusive world wide distribution.

|DRI EXPORTS BY REGION (‘000 metric tonnes) |

|Region |1993 |1994 |1995 |1996 |1997 |1998 |

| | | | | | |(Est) |

|European |218.0 |296.7 |221.1 |161.4 |225.0 |215.0 |

|Union | | | | | | |

|CIS |- |52.1 |96.3 |68.8 |72.5 |95.0 |

|USA |5.0 |- |- |37.1 |42.5 |57.5 |

|Australia|33.0 |26.0 |0.4 |44.3 |28.5 |35.0 |

|Total |331.0 |402.1 |429.2 |367.1 |453.5 |477.5 |

Since it gained the control over DRI exports, MiddleSex has managed

to significantly expand the company’s customer base. Currently, OEMK’s DRI

pellets feed steel mills in USA, Spain, Germany, Italy and Mexico.

According to my observation I believe that a vertical integration of

MiddleSex’s steel activities is possible and would be highly beneficial for

both partners. Assuming that MiddleSex takes an equity interest in

Lebedinsky GOK, the raw material supplier (such as iron ore), and increases

its equity interest in OEMK, MiddleSex would have an economic exposure to

entire steel operation, from the raw material (Lebedisky), through the

steel mill(OEMK) to trading (MiddleSex/WolffSteel)

Non-ferrous Metals

Aluminium was one of the original businesses which Masoud Alikhani

injected into MiddleSex when he joined in 1993. The aluminium business was

built upon Mr. Alikhani’s trading relationship with Tadaz, the third

largest aluminum smelter in the world, located in Tajikistan. Historically,

the relationship with Tadaz was that MiddleSex would supply the aluminium;

it would pre-finance the processing and in return it would receive the

aluminium which it would then sell in the international markets. The

relationship worked profitably. However, throughout 1996, the political

situation in Tajikistan deteriorated, trading cycles became longer and no

deliveries were made in the last six months of 1996, leaving MiddleSex

owned some US7.9m(Ј 4.6m). MiddleSex believes it will recover this debt: it

has already received US$2.4m(Ј 1.5m) in late June 1997. Negotiations are

well advanced to collect the balance.

During 1996 MiddleSex diversified its non-ferrous business into

nickel. In October 1996 it entered into a short-term pilot contract with

Napo Invest and Trade Corp., a company incorporated in the British Virgin

Islands and run by Mr. Yuri Murkin, a business associate of Mr. Alikhani,

and two Russian companies: Koks, which owns the Kemerovo coke plants and

Kombinat Yuzhuralnikel, one of the biggest Russian nickel producers.

The government recently sold its 38% in troubled Norilsk Nickel, the

biggest but also heavily debt-ridden Russian nickel producer. Following the

Norilsk example, Yuzhuralnikel could be the next to be auctioned. Interfin,

MiddleSex’s 40% owned investment, has already secured a 14.7% interest in

the Yuzhuralnikel nickel plant, which gives MiddleSex a 5.9% indirect

interest.

Overall I believe that MiddleSex is in strong position if it decodes

to increase its interest in

Yuzhuralnikel and therefore its Yuzhuralnikel exposure to nickel. However,

I have assumed that MiddleSex will only extend the trading with

Yuzhuralnikel.

Financial Services

The backbone of MiddleSex’s financial services operations is the 40%

owned Interfin (Interbank Investment and Finance Company). The remaining

60% is held by GAZPROM (20%), OEMK(20%) and Mapo Bank(20%). MiddleSex’s

financial services include:

. trading in Russian capital markets;

. financial advise to western companies or potential business in Russia,

and

. advice to Russian companies entering western capital markets.

Established in late 1994, Interfin commenced by trading in Russian

treasury. Initial returns were good and Interfin quickly made substantial

profits, which enabled the company to start bying stakes in various

Russian companies. As a result, Interfin has built an impressive asset base

of which the company estimated to be in excess of US$300m.

MiddleSex - GAZPROM relationship

MiddleSex holdings - a small, London based trading group - is

advertising the world biggest producer and Russia’s biggest company GAZPROM

on cheaper ways to raise finance. The appointment came as a result of the

close contact between MiddleSex’s and Interfin’s top management and

GAZPROM. Principally the role consist of :

- Providing independent advice in relation to the selection and

implementation of different fund raising strategies and regulatory

requirements of international capital markets;

- Liaison with advisors, once appointed, on behalf of GAZPROM as well

as coordination of GAZPROM’s fund raising and corporate activities;

- Assisting in the design and implementation of special project

finance schemes and structured long-term program of public and

investor relations aimed at strengthening GAZPROM’s position in the

international capital markets.

In returns for its services MiddleSex receives fees, depending on the

type of service provided, and determined by GAZPROM’s board, plus the

reimbursement of its expenses in connection with travel, presentation and

other expenses.

If relation with GAZPROM maintained, and GAZPROM’s current financial

restructuring and capital raising plans are carried out, I think this is

the one of the most important step for MiddleSex holding, and they are well

positioned to benefit and generate significant returns.

Conclusion.

To sum up then, taking a closer look at the Annual reports of the

companies just confirming what I have researched through different types of

magazines and newspapers, as well some official reports of the company.

Through out the official statements it is crystal clear that company had a

very big boost when Massoud Alikani has arrived and restructured the

company almost completely, as well as brought some past experiences idea

from the time he worked in Russia.

Then the company had another big growth in 1996 when the steel

trading became the flagship operation and they started to work with OEMK.

References:

1. Guardian newspapers;

2. Financial Times newspapers;

3. Newsweek magazine;

4. Economic Research (russian);

5. MiddleSex Oficial Financial Statements .