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.

Abramovich behind ultra rich hospital

Wealth Bulletin

20 March 2008

Jason Corcoran, Moscow

Billionaire's investment vehicle is behind a clinic for Russia's millionaires

Russian oligarch Roman Abramovich has opened a luxury hospital in Moscow for the city's millionaires.

The hospital has been established by Abramovich's investment vehicle Millhouse Capital, which invested about $10m in the project, according to Russian newspaper reports.

The clinic for millionaires will distinguish from the vast majority of the city's hospitals, where most of equipment dates back to the Soviet era. Russia's ultra rich previously had to travel to go to Israel, Switzerland or the US for first class medical services.

The hospital is capable of servicing up to 50 VIP patients at a time and the average annual fee will be 1.5 million rubles (about $64,000) per patient.

It is located in the north-west of Moscow, close to the so-called reservation of millionaires, known as Rublyovka. President Putin has a luxury bungalow located in Rublyovka, where houses go for anywhere from $5m to $20m.

Artyom Tolokonin, a spokesman for the hospital, said the hospital hopes to attract not only wealthy Russians, but Western millionaires too.

Chelsea football club owner Abramovich runs his multi-billion dollar assets through Millhouse, which includes a 44% stake in Russian steelmaker Evraz Group.

Russian magazine Finans last month said Abramovich had increased his fortune by 9.5% to $24bn last year.

Serious business as usual in the silly season

Financial News

Letter from Moscow

Jason Corcoran

20 August 2007


The Russian silly season is in full swing. A submarine has planted a flag on the Arctic seabed, former President Mikhail Gorbachev is the face of luxury luggage label Louis Vuitton and President Vladimir Putin has been photographed fishing topless with Prince Albert of Monaco.

The August vacation may be well under way but some serious business is being conducted from Moscow as billionaire Oleg Deripaska generates enough news to power one of his aluminium plants.

With Putin on an adventure holiday in Siberia, his favourite oligarch has taken centre stage with several bold moves. Deripaska, whose estimated $20bn fortune includes Rusal, one of the world’s largest aluminium companies, looks set to take over privately owned oil company RussNeft and has emerged as a 5% shareholder in US carmaker General Motors.

Basic Element, Deripaska’s holding company, is seeking regulatory approval to buy RussNeft after its owner, Mikhail Gutseriyev, resigned, claiming he was forced out in a campaign by police and tax authorities.

Commentators have speculated that Basic Element is a vehicle for the purchase and RussNeft might end up in the hands of state-owned Rosneft or Gazprom.

Deripaska’s holding in General Motors is part of a spending spree in the automotive industry, including the UK’s LDV Vans last year and a pending $1.5bn minority stake in Magna International, a Canadian car parts maker. Basic Element also dabbles in aviation, insurance and construction and is in talks to buy half of Transstroi, Russia’s largest builder.

According to Forbes’ list of the world’s billionaires, Deripaska is the richest man in Russia along with Chelsea Football Club owner and one-time partner Roman Abramovich. Like his London-based friend, Deripaska owns a pile in London’s Belgravia and was said to be interested in buying rival Premier League team Arsenal.

However, Deripaska said he has no interest in moving from Russia, where he maintains a low profile. Indeed, the patriotic former Soviet army sergeant appears to continue serving his country after declaring recently that he regards himself as little more than a caretaker of assets for the state.

This led to concerns that these assets could wind up under control of the Kremlin, as outlined by Magna in a recent shareholder memorandum. Magna also disclosed that Deripaska’s US visa had been revoked because of questions about his business dealings. His rivals allege that he uses strong-arm tactics in hostile takeovers and is not easily dissuaded from backing down.

A one-time metals trader, Deripaska is a winner of the murky aluminium wars of the 1990s. Over the past five years, he has gained control of leading producer Russian Aluminium, which merged with Sual and Glencore last year to create Rusal.

When it conducts its initial public offering of as much as 25% of the group in November, Rusal could raise $7.5bn, making it one of Russia’s largest companies by market value. Yet Deripaska has been absent from investor presentations in London and New York. Rusal is keen instead to wheel out chief executive Alexander Bulygin to meet analysts and the press.

Rusal’s approach underlines how Russian companies looking to tap western capital markets are often keen to talk up their plans but remain reluctant to discuss their corporate histories.

Investors may have some tricky questions for Rusal but the sellside will have no such qualms, judging by the line-up of banks for the impending deal. Morgan Stanley, Deutsche Bank and JP Morgan Cazenove were last month appointed co-arrangers, and Goldman Sachs, Credit Suisse and UBS were mandated as bookrunners.

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