BANKER'S BLOG: UK retailer DSG loses its Russian Eldorado

By bne IntelliNews June 26, 2007

bne -

ED - this is a new column written for bne by a senior member of the Russian investment community on what people are really saying about what's going on in Moscow's business world.

For a few years already, DSG International, Europe's second-largest electronics retailer, had an option to buy Eldorado, the Russian electronics chain, for $1.9bn. An analyst quoted by Bloomberg - who was likely applying the tried-and-true finger-to-the-wind method of valuation for a private company on which he would have zero insight on -- estimated the value of the option to DSG at $5.0bn, which is no small sum to walk away from. But last week, DSG International said that after an examination of the company's accounts, they wouldn't exercise the option.

DSG had been hand-in-glove with Eldorado for years already, and presumably they would have known about any oddities in the figures a long time ago. The reason for the collapse of the deal, which the press lapped up unquestioningly, was something very different.

What happend? Eldorado realized that the option was like, well El Dorado for DSG. The company is worth far more than the original sum the two parties had agreed on. And Eldorado was feeling less keen on selling out to some Brits who hadn't added a great deal of value to what was a fairly well run operation in the first place.

Word is that in the early days of their relationship, DSG sent their second-teamers to Moscow: a bevy of less-than-impressive British boys from the home office who parachuted in every week who didn't know -- nor want to learn -- the first thing about doing business in Russia, which of course is a prerequisite to telling people doing business in Russia how to do it better. This was hardly the way to add value to the folks at Eldorado, who likely did the deal in the first place primarily as a way to improve their competitive positioning by leveraging the global insight and expertise of their partners. After a while, Eldorado got tired of DSG's monkey tricks.

The obvious journalist pap angle is Tony Blair's recent finger-wagging about the dangers of investment in Russia, the lack of the rule of law, the unenforceable nature of contracts...; cue hand-wringing and brow-furrowing and other acts of self-flagellation.

So DSG probably could have in theory exercised the option (with the usual Russian court wrangling). But would you pay $1.9bn to marry someone who didn't really like you or respect you, or want to be with you at all? Probably not.


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