Thursday, 16 October 2008

Oligarchs make the most of Russian M&A activity

Financial News

Jason Corcoran in Moscow 13 October 2008

Many holdings are up for sale

Oligarchs on opposing sides of the cash crisis are set to trigger a boom in merger and acquisition activity in Russia and the Commonwealth of Independent States.

Cash-tight tycoons are being forced to sell holdings to meet pending margin calls while their rouble-wealthy counterparts are sizing up distressed assets affected by the liquidity crunch.

Oligarch Oleg Deripaska had to sell a stake in Canadian auto parts maker Magna to meet a $1bn (€734m) margin call while Ukrainian billionaire Kostyantin Zhevago was forced to sell a large stake in Swiss-based ore miner Ferrexpo worth $180 in order to meet a margin call by JP Morgan.

Analysts are predicting Deripaska, who has $28bn, may have to divest further holdings in his Basic Element investment vehicle to shore up his finances.

Marat Gabitov, a Moscow analyst at UniCredit, said: “We see the news as further confirmation that the global financial crisis may be worse than we previously deemed. We also see risks for other public names in which Deripaska controls significant minority stakes – Strabag, Hochtief and GM, of which we know that Strabag was financed with a bank loan.”

Oligarchs with limited equity exposure are looking to pounce on distressed assets in Russia and the Commonwealth of Independent States. Rinat Akhmetov, the wealthiest man in Europe and Russia with an estimated fortune of $31.1bn, is putting together a war chest to fund an acquisition programme of coal assets worth between $50m and $500m in Russia, Ukraine and other parts of eastern Europe.

Yuriy Ryzhenkov, chief financial officer of Akhmetov’s main Ukraine-based energy holding company DTEK told Financial News: “We are now looking outside Ukraine, having focussed ourselves domestically until recently.

Now, we are looking at the resource base in Russia, especially regions close to Ukraine due to logistical reasons. We are also looking outside Ukraine westwards for new customers and new generations in Romania, Hungary and Poland. The assets there can have a synergy with existing assets in Ukraine.”

Ryzhenkov said DTEK would like to buy assets cheaply and then turn them round. He said: “We have some core abilities to turn distressed assets round and it is our experience in Ukraine and especially in coalmining to work on geologically difficult assets.”

Stephen Jennings, chief executive of Renaissance Capital, is forecasting an M&A boom for his brokerage as Russian and CIS businessmen are forced to sell to those with liquidity.

He said: “Consolidation in finance, for instance among banks, brokers and asset managers, will be extraordinary.”

Jennings last month sold half his business to oligarch Mikhail Prokhorov’s Onexim investment fund for $500m, even though Renaissance had been valued by bankers at $3bn to $4bn a year ago when VTB Bank made its approach.

The Wall Street Journal revealed that Dutch bank Fortis had appealed directly to billionaire Suleiman Kerimov’s Millennium Fund during the summer for a €400m ($546m) cash injection in the context of a share issue.

Swiss-based Millennium Fund already owns about 2% of Fortis shares along with stakes in US investment bank Morgan Stanley, Swiss bank Credit Suisse and Deutsche Bank of Germany, according to the Wall Street Journal.

Analysts are predicting Kerimov might return his attention to Russia having sold down his stakes in blue chips before the downturn. Oligarchs exposed to Russia’s property and construction sectors are already offloading assets and freezing developments as the country’s real estate bubble shows signs of bursting.

Ratings agency Fitch said reports that Sistema-Hals is likely to sell almost a quarter of its projects to raise up to $500m of cash and that developer Mirax is likely to undertake something similar highlight a deterioration in the funding environment for developers.

Sistema-Hals is the listed property arm of conglomerate Sistema, headed by oligarch Vladimir Evtushenkov, while Mirax is owned by billionaire Sergei Polonsky.

Mirax, Sistema-Hals and Inteko headed by Russia’s wealthiest woman Yelena Baturina have already announced project freezes over the next year, according to reports in the Russian press.

Liquidity problems have extended to Russia’s consumer sector.

Yevgeny Chichvarkin, chairman of Russia’ largest mobile phone retailer Euroset, said he had sold his company for “a few kopeks” to billionaire Alexander Mamut after being unable to find a bank to refinance its debt.

Mamut’s investment company ANN may have used some of those proceeds from his sale of a 38% stake in insurer Ingosstrakh to Czech investment firm PPF for €600m to acquire 100% of Euroset for $400m.

State banks such as VTB are also planning to capitalise on assets trading at distressed levels then resell them later for a profit. VTB chief executive Andrei Kostin told a Reuters summit in September that the bank is accumulating a “cash fist” to potentially buy stakes in businesses.

Russian banking, consumer and real estate sectors were mentioned, as well as banking assets abroad. Some oligarchs and billionaires had the prescience or good fortune to offload large stakes in Russian blue chips before the market slide, which has wiped 60% of the value of the domestic equity markets since late July. Tycoons were encourage to buy into “People’s IPOs” by the Kremlin in the past couple of years, including Rosneft, Sberbank and VTB.

One Moscow trader said: “Some oligarchs sold out after a year of these major listings. They locked in some profit and got out but others have been hurt.”

Baturina almost halved her stake in state savings bank Sberbank from 0.68% to 0.38% after the shares lost half their value during the second quarter this year.

Baturina, who has an estimated fortune of $4bn, initially bought into Sberbank last year following the bank’s IPO.

Her equity fund Kontinental’s proceeds from securities sold in the second quarter came to 5.4bn roubles (€151m), according to the fund’s financial statement.

Kerimov, who owns Nafta Moskva oil refinery, is reported in the Russian press to have sold down his 6% stake in Sberbank and 4.5% stake in energy group Gazprom.

Kerimov has also sold stakes in silver producer Polymetal for around $2bn, in a construction project for $3.5bn and in NTK cable TV operator for another $1.5bn.

Filaret Galchev, owner of Russia’s largest cement producer Eurocement, has cut his stake in Sberbank to 1.85% from 3%. Galchev has since acquired a 6% stake in Swiss cement group Holcim.

Recruiters are reporting a growing trend by oligarchs to hire seasoned fund managers and bankers from investment firms and banks as they increased their private equity-style investment funds.

Millhouse, the investment vehicle of Russian oligarch Roman Abramovich, hired the general director of MDM Bank’s MDM Asset Management in July to run its portfolio of investments while Prokorov’s main strategist and head of Onexim is Dmitry Razumov, a former banker at Renaissance Capital.


Anonymous said...

According to Forbes list 2008, Oleg Deripaska was the richest Russian at $28B. He no longer is, but he was the richest Russian. Roman Abramovich came in at number 15, which he no longer is but that was his ranking. Then we have Alexei Mordashov and Mikhail Fridman rounding out the top 20 and none of them are that this level or near it.

While in July of 2008 before the bottoming of the Russian stock market both the RTS and Micex Rinat Akhmetov had a net worth of $7.3B by Forbes. He is also not Russian, but Ukrainian.

He is not Europe's richest man by any means.

Additionally, he is heavy in the metals, mining and energy so have you looked at the commodities lately. I guess not because he is not worth near $7.3B if you google around to very reputable sources.

Just an excerpt for you from Forbes:
Akhmetov built Ukrainian coal-and-steel empire in the mid-1990s by forging ties with then prime minister Viktor Yanukovych. After his ally lost the 2004 presidential election, Akhmetov had his key asset, Ukraine's largest steel company Kryvorizhstal, reprivatized. Things were looking up when his Party of Regions was back in the majority for part of 2006 and 2007, but that changed when the opposition won subsequent elections and began reviewing his energy holdings. In December his metal-and-mining holding company Metinvest finalized plans to merge with SMART holding company; he will retain a 75% stake in Metinvest.

I say do more research before you claim some is the richest man in Europe.

Anonymous said...

Hi Anonymous,
It's hard to estimate and some of these surveys are highly speculative but i reckon Mr Akhmetov has considerable more wealth than any of the oligarchs you may cite in Russia and the CIS.

Earlier this year, Kommersant put Akhmetov's wealth at $31.1bn, twice as much as last year and $1.4bn more than the cost of the assets of the wealthiest Russian citizen Oleg Deripaska.

Moreover, according to calculations of the investment company Dragon Capital the owner за System Capital Management has now become the richest person in Europe. He has left behind the Swedish businessman and owner of IKEA Ingvar Camprad, who has lost $2bn of his assets value within a year.

Akhmetov's main holdings SGM and DTEK are privately held 90% by him and 10% by his wife. His holdings have not been hit by the stock market collapse and he hasn't been hit by any margin calls from investment banks due to the amount of cash sitting on his balance sheet.

Jason Corcoran

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