Maersk makes waves in Russian market
By John Helmer
MOSCOW - The takeover announced at the start of this month by Global Ports Investments (GPI) of the National Container Company (NCC) gives control to GPI of more than 72% of container transportation volume in Russia's west, including the Black and Baltic Seas; and more than 82% of Russian box volume in the northwest, from the Gulf of Finland to the Arctic.
Calculations by Moscow maritime expert Alexei Bezborodov indicate that with accumulated capacity of 1.7 to 1.8 million Teu per annum, Global Ports is taking "a monopoly position in the market". Teu stands for twenty-foot equivalent unit, a measure of container length and of cargo capacity roughly equal to 22.6 tonnes. As of August 31, the volume of the total Russian market
stands at 3.5 million Teu. In the Russian Fareast, volume is currently 1 million Teu.
The takeover deal must be approved by the competition authorities in Russia, Ukraine and Cyprus. In addition, because a foreign shareholder holds more than 25% of Global Ports - that's the APM Terminals company of the Maersk group of Denmark - the takeover must be approved by Russia's Control Commission. This is the ministerial body, chaired by the prime minister, which regulates foreign involvement in strategic resources of the Russian economy.
The Federal Antimonopoly Service (FAS), headed by Igor Artemyev, is the regulator in charge of the competition review. It is also the staffing agency for the Control Commission.
Artemyev has a record of putting his finger up to test which way the Kremlin wind is blowing on such deals. For the time being his finger is invisible; he is saying nothing. A spokesman for FAS confirms that both reviews are under way. "All this should take about a month," the spokesman said, "but it can be extended." Extensions are what happen when a deal runs into head and cross winds. In this case, the biggest of these is likely to blow from Vladimir Lisin, who owns the Universal Cargo Logistics Holding (UCLH), a direct competitor for Global Ports and NCC. Lisin's foreign partner and competitor for Maersk is the Mediterranean Shipping Company and its Terminal Investment Ltd (TIL) unit.
The Russian shareholders of Global Ports are Nikita Mishin, Andrei Filatov, and Konstantin Nikolaev. For their story, with hints of who their silent partners are, read the backfile. A tussle between the troika and Lisin would involve the senior government ministers, and in the end President Vladimir Putin. In his St Petersburg past, he has had a soft spot for Maersk, from before the banana boat run into St Petersburg, and many years before Vladimir Kekhman [whose now bankrupt JFC is Russia's largest banana import company] was disposed of.
The timing of the proposed monopolization of the container business is at least as problematic as the foreign participation. That's because the boom in container movement into and out of Russia has been sharply curtailed by the global economic recession of the past year.
Global Ports ended 2012 with revenues of $501.8 million; this was static compared to 2011. Costs jumped 24% to $343.2 million. The impact was that operating profit contracted by 30% to $157.3 million. Earnings gained 2% to $287.9 million, but after-tax profit plunged 16% to $123.5 million.
Global Ports' container operations in Russia contribute almost three-quarters of revenue; they grew by 8% for the year. The operations included Petrolesport (PLP) and Moby Dik container terminals at St Petersburg, VSC at Vostochny; altogether, containerized cargo grew by 8% over the year to 1.45 million Teu. Cargo volumes also picked up at these locations for bulk cargo, cars and roll-on, roll-off movements. By contrast, the group's Vopak oil products terminal at Tallinn, Estonia, suffered a 35% drop in cargo tonnage to 10.4 million tonnes.
Lisin has already conceded that the container business has slowed down sharply. Because the prospects for recovery are so slow, he's been obliged to abandon his plan to make an initial public offering (IPO) of shares in his Dutch-registered UCLH. Instead, the new plan, Lisin indicated in May, is to find a strategic investor for the port assets, and concentrate on an IPO for his Russian rail assets next year.
UCLH spokesman Leonid Aver denies his group is under pressure. "There has not been a rejection of IPO. We are considering different options - first of all, a strategic investor, and then perhaps an IPO. It's too early yet for an IPO for the port division."
Lisin owns the Fourth Stevedoring Company in St Petersburg, also known as Container Terminal St Petersburg; plus port companies at Tuapse (Black Sea) and Taganrog (Azov Sea), and a terminal at Ust-Luga called Multipurpose Reloading Complex. Together, they are reported to have had cargo turnover in 2012 of 32.6 million tonnes, with revenue of $350 million and earnings of $170 million.
According to industry reports, the ports may be worth between $1.2 and $1.4 billion. Aver denies the valuation. What is certain is that whatever the assets appeared to be worth a year or two ago, they aren't likely to enjoy significant gains in share price or market capitalization, if floated on the London Stock Exchange. If as UCLH acknowledges now, the plan is to find specialized regional buyers, buying interest is probably limited to specialists in grain transportation and containers.
This is a tabulation of the top-10 container companies operating at Russian ports as of June 30. The data have been prepared and analyzed by the industry expert, Moscow-based Alexei Bezborodov, editor in chief of Infranews.ru.
Top-10 Container Operators in Russia, with Annual Growth Rate
Bezborodov is also predicting the emergence of APM (Maersk) as the dominant shareholder in the new combination of Global Ports and NCC as the Russian stakeholders are short of cash. Releases by the dealmakers indicate that after the NCC shareholders receive 18% in the expanded Global Ports company, APM will have 30.75%; the troika of Global Ports founders (Mishin, Filatov, Nikolaev), 30.75%; with a 20.5% free float of London and Moscow shareholders.
The announced deal terms provide the NCC sellers with $291 million in cash, and they will be able to start selling their 18% - now worth $310 million - after a six-month lockup, with APM in pole position to buy. Counting NCC's $916 million in debt which Global Ports is taking on, the deal is costing $1.6 billion. The Ukrainian container terminal at Ilyichevsk can be sold separately over the next three years.
Denis Vorchik, maritime analyst at Uralsib Bank, has reported to clients that despite the hefty increase in its debt, the deal is an "excellent fit for Global Ports. NCC, which operates marine container terminals in St Petersburg, Ust-Luga, Shushary (inland container terminal) and Ilyichevsk, is an excellent fit for Global Ports' assets portfolio. In addition to increasing bargaining power in St Petersburg, Global Ports could benefit from synergies in overheads and expand its geographical footprint to the Black Sea basin through the container terminal at Ilyichevsk."
Russian sources see the alliance between APM and the three Russian control stakeholders in Global Ports as an emerging "national container champion" to threaten the container business of Ziyavudin Magomedov at Novorossiysk port.
A report by Irina Stupachenko and Denis Ashurkov at Otkritie Capital in Moscow warns that NCC is exiting the Russian container business when growth and profit prospects are dwindling. They claim Global Ports is paying too high a price for the takeover, and will potentially suffer from the heavy extra debt it is taking on at a time when its container volume is contracting compared to a year ago.
Stupachenko explains: "The company will have a serious job to convince minority shareholders, because many of them have expressed doubts about the feasibility of this acquisition in the context of a significant increase of the company's debt while the dynamics of container handling are quite weak at the main terminals. There's Ust-Luga, which has good growth prospects, but the terminal is in the initial stage of launch.
"The First Container Terminal shows low growth - just 2.9% for the first half of 2013. And in a worsening macroeconomic environment it is quite risky to acquire a container asset, which is highly sensitive to macroeconomic fluctuations, and at the same significantly add to the acquiror's level of debt. You can see that from the first rumours of the deal, the market price of Global Ports shares fell by 25%."
"Accordingly, at the current share price the market has already priced in the effect of the potential increase in debt. So at this price the minority shareholders may be unwilling to sell. However, the question, whether closing the deal will provide more advantages for shareholders than risks, is still valid, in my view. So the company must persuade not only government regulators, but also minority shareholders."
Lisin's spokesman at UCLH refuses to say how his group views the Global Ports takeover of NCC, and whether UCLH intends to oppose it during the FAS review. "We try not to comment on the actions of competitors," Aver said. "Maybe later there will be a statement on this issue." Bezborodov says: "who is against, who's for it - we won't know until later."
According to Stupachenko, the concentration of the market may not be desirable for UCLH and other container operators, but she is predicting that the FAS will approve the deal, adding conditions to prevent tariff discrimination among customers.
John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.