Sistema objects to Russia's de facto privatization rules

By bne IntelliNews October 17, 2012

bne -

In a litmus test for the transparency of the Kremlin's privatisation program, Russian multi-sector conglomerate AFK Sistema is objecting to the sale of a 25% stake in cargo company Freight One to steel magnate and one-time Russia's richest man Vladimir Lisin.

Russian Railways said it chose Lisin's UCL Holding to buy its remaining 25% of Freight One for RUB50bn ($1.6bn) and rejected Sistema's bid, citing the company's "poor financial health," according to reports.

"Earlier, Sistema's bid in the privatisation tender for SG-Trans was disputed by state-owned Rosneft. Sistema's entry into the Russian transport and logistics sector now seems to be in limbo, in our view," Aton added in a note.

The "financial health" reason looks spurious. Sistema is in the middle of a $300m buy-back programme to support its share price and has plenty of cash. Indeed, analysts welcomed the company's failure to buy the blocking stake in Freight One as it leaves more cash for buy backs and so the news is expected to support Sistema's share price.

Russian Railways sold a 75% stake in Freight One in October 2011 in a widely watched sale. The cargo rail sector is beginning to consolidate and Lisin's Independent Transportation Company (NTK) subsidiary beat out fellow oligarch and Kremlin insider Gennady Timchenko in the first sale. Both men have significant oil and metal businesses that rely heavily on rail transport.

However, the auction was dogged by claims of an inside deal between the oligarchs to keep the price down after Lisin beat four other bids by offering RUB125.5bn ($4.05bn) - only RUB125m above the starting price. Observers had been expecting a bidding war that should have driven the final price significantly higher.

The result therefore undermines President Vladimir Putin's promises of "fair and transparent" auctions in Russia's restarted privatsition program. Unlike the 1990s state asset sell off and the notorious loans for shares scandal, the new rules appear to be the state will set a "reasonable" price which oligarchs can't go below. However, it is then up to them to organize backroom deals to share the assets so they can keep the cost of the acquisition to the minimum.

Sistema's objection rocks that boat. According to Interfax, CEO Mikhail Shamolin said on October 16 that the company - owned by oligarch Vladimir Yevtushenkov - is considering filing a challenge with either the rail regulator or the courts. It is reportedly furious that Lisin subsidiary Universal Cargo Logistics (UCL) beat it in the bid for the remaining 25% of Freight One with a bid of RUB50bn, which is just RUB10bn more than Lisin paid in the first auction for equivalent shares.

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Notice: Undefined index: subject_id in /var/www/html/application/controllers/IndexController.php on line 335