Oligarchs turn to (almost) free press
By John Helmer
MOSCOW - What kind of coincidence can it be for two middle-aged Russians with
notable business acumen, Sergei Pugachev and Alexander Lebedev, to be buying at
the same time two loss-making evening newspapers, one in Paris and one in
London, each for each man's young son?
In short, what kind of business is it for Pugachev to buy France Soir and
Lebedev the Evening Standard - and why are they so intent on publicizing the
fact of their takeover while they withhold the financial details and reasons?
At the start of 2008, Forbes estimated that Pugachev had a fortune of US$2
billion; the Russian Finance magazine claimed a year ago that Pugachev was
worth $4 billion. At the same time, Forbes judged Lebedev to be worth $3.5
billion. Neither has been
accused of wrongdoing. In any event, Pugachev enjoys legislative immunity, for
he has been the senator from the Tuva Republic in the Upper House of the
Russian parliament since December 2001.
In Pugachev's case, the takeover of France-Soir was authorized by the
Commercial Tribunal of Lille on January 15. No acquisition price has been
published for an 85% stake in the title, which has a circulation of less than
23,000 copies. In Lebedev's case, the purchase of 75.1% of the Evening
Standard, with a circulation of 287,000, was agreed with the Daily Mail and
General Trust Plc on January 21; it cost one English pound (US$1.42).
Because both newspapers are loss-making, the financial significance of the
transactions is not so much the purchase and sale price, but the estimated
losses and the investment required to cover them. When France-Soir was sold in
1999, it went for a French franc. The latest transaction is the third since
then.
Pugachev's parliamentary office in Moscow, his holding Unified Industrial
Corporation, and the bank he indirectly controls - International Industrial
Bank; in Russian, Mezhprombank, MPB - all decline to answer questions about the
purpose of the France-Soir acquisition, and whether Pugachev has the means to
pay for it.
The French press reporting Pugachev's October 2007 acquisition of Hediard, a
luxury food-products retailer and franchiser, discovered that it was easier to
fix the price of a pot of Hediard's rose-petal jelly than the price of the
company. Hediard's annual turnover was reported to be 30 million euros (US$40
million) in 2008, growing at about 10% per annum at the time. No takeover price
was revealed.
Mezhprombank is described by a banking specialist at Alfa Bank Moscow as "one
of the least public [of Russian] banks. All of its information is very hidden
and rarely reported. Their main business is connected with companies belonging
to the same group."
An investment memorandum issued in 2005 by Dresdner Kleinwort Wasserstein for
the raising of $300 million in bonds indicated that 72% of the bank was
controlled by Pugachev, refraining from mentioning his name while stating that
a single individual held such a stake. Formally, it is believed the bank is
owned by a New Zealand-registered family trust, and controlled through seven
Russian cutout companies.
In September 2008, the bank was rated 30th in Russia by size of assets. At the
time, the total was reported to be 118 billion roubles (US$3.6 billion at the
current rate of exchange). The bank's website is obsolete, its last news
reported on January 19, 2006.
Standard & Poor's, the international corporate rating company, issued a
ratings improvement for the bank in February 2008, lifting it from "B+" to
"BB-", with a forward prognosis of "stable". The fine print of the ratings
announcement, however, carried the warning that the bank's lending and capital
were highly concentrated among related parties, especially Unified Industrial
Corporation, Pugachev's holding.
According to S&P, Pugachev's bank was characterized by "the absence of an
accurate strategy for attracting finance; an unclear strategy of development,
in particular concerning retail business; insufficiently developed systems of
risk-management and high level of risks." S&P said it wasn't sure what
might happen to the bank's capital if the financial markets turned "adverse".
Now that this is exactly what has happened, S&P says the bank is due for a
ratings review next month, and that the data for the review are likely to
arrive on time. No word of the impact of the financial crash on the bank's
profit and loss line is available.
Why would a man as secretive as Pugachev, with a bank and a holding that avoid
published audit reports and public scrutiny, take a seat in parliament and buy
a public newspaper in Paris? Not because he says he values free speech, because
he doesn't say anything at all. Nor because he wants to be accountable to
electors, shareholders or clients.
When the English press detected a year ago that Pugachev was negotiating to
acquire an interior decorations business from Viscount Linley, a nephew of
Britain's Queen Elizabeth, it was supposed the deal "would ease his entree to
British high society, as he snaps up a clutch of luxury brands in western
Europe". Pugachev was reported at the same time as owning a chateau near Nice
and two villas near Cap Ferrat. For some reason, the deal announcement, which
was reported to be imminent in January 2008, has not materialized. Linley is
currently offering a Claridge's Tub Chair for new customers, and slashing
prices on stock. It seems Pugachev isn't buying.
What is clearer in Russia is that Pugachev's attempt to take control of St
Petersburg principal shipyards, and consolidate them into a single maritime
construction business, has failed to win Kremlin or Defense Ministry approval -
after a decade of costly buyouts and lobbying. This outcome has left the
holding, and probably the bank, with substantial obligations, and a future
order book without state underwriting or guarantees.
There have been reports that Pugachev cannot agree on a price for selling out,
and he is uncomfortable at the cost of staying in. Accordingly, if he has
reason to fear becoming the target of a hostile takeover, and if he is
resisting, then it may be prudent to prepare a bolt-hole abroad - or two or
three. If an application for political asylum became necessary, would the price
of France-Soir be worth paying for that?
Across the English Channel, in London, Lebedev's takeover of the Evening
Standard looks "strategic" to sharp observers, but they can't agree on what the
Russian strategy is. Nor is it obvious that if Lebedev can afford it, the asset
would prove to a rational businessman to be worth the price.
Reported in the London media to be "a public-spirited tycoon", Lebedev's only
outlay bigger than a pound that has been disclosed to date is his announcement
of "tens of millions of pounds in the next couple of years. Of course, we have
a plan, a business plan." On the question of how Lebedev could afford to pay,
Lebedev said last week that he was worth $1.5 billion, less than half of the
$3.5 billion fortune attributed to him by Forbes magazine a year ago.
Forbes' notice on Lebedev claimed that "most of his fortune [is] now tied up in
Gazprom and Unified Energy Systems shares". If so, then Lebedev's fortune ought
to have declined in proportion to Gazprom and UES. Since Gazprom stock is now
worth 20% of what it was at peak, when Forbes was doing its sums, and UES stock
is now 5% of what it was worth at last year's high, and supposing his portfolio
was constructed as Forbes reported, Lebedev's stakes should be down to between
$175 million and $400 million; that's a fraction of the lowest figure Lebedev
has conceded to London inquiries so far.
According to an analysis by the Fitch ratings agency in Moscow last July,
Lebedev's principal asset, National Reserve Bank, was selling its Gazprom
shares between the second half of 2007 and the second half of 2008. Does this
mean the bank was selling the stock to Lebedev, or that they were acting
together to sell? Lebedev claimed last week in Moscow that he still controls
half of 1% of Gazprom; but he omitted to say whether he means himself or his
bank. A stake of that size is currently worth $387 million.
Whatever Lebedev's holdings may be - he appears to hold no more than 78% of the
bank through his holding called National Reserve Corporation - if they are also
pledged to secure borrowings, then Lebedev might be motivated to sell real
estate and aircraft for want of anything else more liquid. But according to his
public remarks, Lebedev's acumen is more valuable than the money he's putting
into the Standard. He's cleverer than Karl Marx, according to himself. "I was
trying to prove one thing which was contrary to what Karl Marx said, that you
could have values and morals added to money."
Lebedev's personal website claims that Lebedev holds a 26% stake in Ilyushin
Finans, a leasing concern for Russian-made civil aircraft. That, according to
the company's own reports, is in financial trouble. On December 29 last year,
it borrowed 1.2 billion roubles from the state-controlled Vneshtorgbank (VTB)
to cover bills due from aircraft engine suppliers. At the same time, the
company publicly appealed for state financing guarantees of 40 billion roubles
for two years to cover an order book of aircraft and components.
Other assets reported on Lebedev's website include a company specializing in
growing potatoes. There is no reference to the liabilities and debts of the
holding, the pledge status of the assets, or the net worth.
National Reserve Bank published its last annual report for 2007; Deloitte
Touche was the auditor. The annual report attaches a one-page excerpt of the
auditor's report, but the full report is not published.
The bank's assets were reported to have reached 40.1 billion roubles, growing
at an annual rate of 26%. Independently of the bank's own reports, the asset
base had grown to 48 billion roubles as of October 1, 2008. Depending on which
rating service and what date you choose, this puts the bank at either number 46
or number 60. That's not what is usually meant by leading its field.
In 2007, the loan portfolio for the year totaled 31.2 billion roubles. Related
parties - that is, companies in which Lebedev and related shareholders had a
substantial interest - accounted for 26% of the outgoings - that is, one rouble
in every four handed out by the bank. Analysts at Alfa Bank and Troika Dialog,
leading Moscow investment houses, say they do not cover National Reserve Bank,
and can't vouch for its valuation or profitability.
The bank acknowledges that between 2006 and 2007, despite the expansion in the
asset base and loan book, the bank's profit fell by 39% to 5.7 billion roubles.
The bank's annual report explained: "This decrease is of a planned nature and
shall not raise any apprehension."
Since most of the net income was reported to have been earned from "securities
operations", it is reasonable to suppose that last year's crash of the Russian
stock market may have transformed the profit and loss results for 2008. A
notice posted by the bank on January 16 - but missed by every newspaper
reporter in London - disclosed that net profit for 2008 (Russian Accounting
Standards) had come in at 2.5 billion roubles. That represented a fall of 56%.
If Lebedev's 78% stake in the bank entitled him to that share of a 100% payout
of profit in dividend, then Lebedev might have less than $60 million in fresh
cash from the bank to cover all his lossmakers, plus the Evening Standard.
Lebedev told a Rome-based reporter last week that National Reserve Bank "makes
the equivalent of 100 million euros a year in profits ... Everything I have is
loss-making, with the exception of the bank." Maybe he was referring to 2007.
Asked directly, National Reserve declines to give revenue, costs and income
results for 2008. The bank spokesman also refused to transfer the inquiry to
Lebedev's office. She also would not give her last name.
The Moscow branch of Fitch says it assigns Lebedev's bank a "B" rating. Fitch
also acknowledges that National Reserve has not been rated since July of 2008,
and that no financial data or estimates for the second half or the full year
have been gathered to advise the market on what has happened to cause the
bottom-line collapse in the past six months.
What is known for certain is that Lebedev doesn't own the 30% of Aeroflot that
has been attributed to him in London. Russian reports disclose that Lebedev
sold a 4% to 5% stake of the state-controlled airline to Vneshtorgbank late
last year and has been obliged by Deutsche Bank to post the remaining 25% stake
as security for a $145 million loan. At the current market value of Aeroflot,
that stake is worth about $190 million. With Deutsche Bank's hands on it, it
contributes zero to Lebedev's net worth.
It's possible, if what Lebedev has publicly said is true, that his cash
commitment to the Evening Standard takeover is so small and so limited he
doesn't need to demonstrate wealth; and an investigation of the lack or loss of
it won't make much difference.
"Mr Lebedev", the Telegraph newspaper reported in London on January 25, "is to
spend 25m pounds revamping the title, [and] said he has seen his wealth
halve in the past six months and will not be able to commit to the title for
more than three years if markets continue to fall. 'The last thing I want is to
be short of cash, with the market moving against us and no revenues. Then we
would have to close. I mean, these things happen in life. One has to face
things straightforwardly'." Closed is exactly what the Standard's competitors
for print advertising revenue want, notably the for-free Rupert Murdoch-owned
evening publication, thelondonpaper.
Dividing 25 million pounds by three years suggests Lebedev is offering the
Evening Standard no more than 8.3 million pounds (or US$11.5 million) per
year. This is hardly the stuff that oligarchs or billionaires are made of - and
it's less than the Standard's former owner, Viscount Rothermere, is estimated
to have been losing on the asset for the past year. According to the Telegraph,
Rothermere asked Lebedev where the money was coming from. "He had to prove he
had the funds in place to support it," according to the Telegraph. Which raises
the questions - how much, from where or whom, and how to be sure?
In the tropical fantasy land, for which Rodgers and Hammerstein wrote Some
Enchanted Evening, the song suggests how to deal with tricky questions
like these:
Who can explain it?
Who can tell you why?
Fools give you reasons,
Wise men never try.
John Helmer has been a
Moscow-based correspondent since 1989, specializing in the coverage of Russian
business.
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