The Kremlin is lining up an audacious deal for one of its proxies to acquire Alfa Bank, Russia’s largest private lender by assets and a vital cornerstone of the nation’s financial scene since the early 1990s, bne IntelliNews can reveal.
Either state-controlled VTB Group or Gazprombank, Russia’s second-largest and third-largest lender, respectively, will be allowed to swallow up Alfa. Mikhail Fridman, the billionaire oligarch founder of the bank who relocated to London in 2015, has agreed in principle to do a deal although the price may still be a sticking point, according to well-placed banking sources.
When asked by a bne IntelliNews correspondent at dinner in the 90's if he would ever sell Alfa Bank, at that time the biggest and most profitable privately owned bank on the market, Fridman replied: “Of course. I will always sell. If the price is right. And for Alfa Bank it will have to be a very good price indeed.”
A plan to sell Alfa to one of the state banks has been across President Vladimir Putin’s desk, the sources claim. The future of Alfa as an independent private player has been in jeopardy ever since Fridman transplanted himself to the UK and opted to invest his $14bn bounty from the $55bn sale of the oil producer TNK-BP to Rosneft in projects outside of Russia.
Following the TNK-BP deal president Vladimir Putin said in a speech shortly afterwards that the oligarchs were free to spend their money as they liked, but added ominously: “I would encourage them to invest it into Russia.”
For some, the last straw for the Kremlin was when Fridman and his partners swooped to buy Holland & Barret, the iconic UK high-street vitamins retailer, a year ago for $1.7bn after a string of other British and overseas acquisitions.
“The ‘For Sale’ sign for Alfa effectively went up when he bought Holland & Barret,” said a Russian investment banking source. “So much for heeding the Kremlin’s call for oligarch to repatriate his wealth, Fridman was spending it anywhere but Russia.”
Fridman’s move out of Russia is not unusual as most of the oligarchs from Yeltsin-sin era have either been forced out, fled into exile, or are gradually winding down their positions in Russia. Notably from the original seven oligarchs that ruled the roost in the 90s, only Vladimir Potanin, who controls Norilsk Nickel, is still active. Fridman owns several other important assets in Russia, most notably the X5 Retail Group, that is currently market leader and still growing.
Officially, Alfa is denying any future sale but banking insiders insist a deal is on the cards.
“The information about possible sale of Alfa Bank is untrue and is not consistent with the reality,” Anastasia Glukhova, a spokeswoman for Alfa Bank in Moscow, told bne IntelliNews.
VTB CEO Andrei Kostin also went on record last week to deny rumours that his bank was in talks to buy Alfa. VTB announced that there were no plans to buy Alfa-Bank or a stake in it in the next three years, Interfax reports, citing Kostin speaking on the sidelines of the VTB annual Russia Calling investment conference on November 28.
The rumour mill about a potential VTB deal started ticking in July after Alfa hired Vladimir Verkhoshinsky from the state bank in the summer to be its new chief executive. His predecessor Alex Marei had been elbowed last year amid criticism that the bank had been left behind in the fin-tech stakes by its retail rivals Sberbank and the online-only bank Tinkoff.
Another comment by Kostin was rather bizarrely carried by Alfa in their website statement regarding the appointment of Verkhoshinksy, who spent almost a decade as a senior executive under Kostin.
“Verkhoshinskiy is a top professional and a talented manager,” Kostin. “It’s a shame he’s leaving VTB Group but the offer he got to run Alfa-Bank is a big opportunity for his further professional and career growth. I think he made the right decision and sincerely wish him success in his new position.”
Some analysts think Verkhoshinsky, who appears on the popular Russian TV quiz show ‘What? Where? When?’ could be “a Trojan horse” so VTB can get an insider’s take on the Alfa books before any formal takeover bid.
At VTB, he was deputy chairman of the board and the Bank of Moscow, the retail lender acquired by the state bank in 2011 for $3.7bn. Since 2016, when the Bank of Moscow was finally merged with VTB, Verkhoshinsky had headed the retail business.
“Verkhoshinsky is a very talented, young employee and grew into a fairly mature independent worker,” added Kostin. “Here he was not on the first, on the second role, and suddenly he was offered this growth. I always support a person who has an elevator, let him ride in it.”
For his part, Verkhoshinsky boasted that he would set himself the ambitious task of “doubling Alfa’s market share and become an undisputed technological leader.”
“This is an exciting challenge,” he added. “There is a huge potential and strong team at the bank. I am certain of our success.”
Analysts have become very dubious about Kostin’s public pronouncements – not least since he rejected a recent Reuters story that VTB secretly financed a recent deal by Qatar to buy a stake in oil giant Rosneft. The nine sources who told Reuters that in fact VTB did provide a loan to Qatar included a source close to VTB management, a Russian central bank official and a Russian government source familiar with foreign investments in Russia
“We have learnt to take Andrey Leonidovich’s with a little more than pinch of a salt and a shot of vodka,” quipped a banking analyst, who covers VTB.
Alfa is Russia’s fifth largest bank after Sberbank, VTB, Gazprom and recently nationalised Otkritie
Founded in 1990, the bank has about 25,000 employees operating in 774 offices in Russia and overseas.
The lender, which has 15.8mn retail clients and 500,000 corporate customers, is on the Central Bank’s “systemically important list” with assets of about 2.5 trillion rubles as of March 31st this year.
As well as lagging Sberbank, Tinkoff in others in adopting technology and finessing its online banking offering, Alfa’s branches look tired and in dire need of an upgrade.
bne IntelliNews recently visited three different branches in Moscow’s Kurskaya, Semyonovskaya and Arbat regions and the format seems jaded and scuffed in comparison to the modern and bright offices of Otkritie, Citigroup or even Sberbank. Several of Moscow’s notorious bomzhi [homeless tramps] had taken up residence in the Semyonovskaya branch next to the ATM machines after hours as the temperature plunged to minus 15.
Fridman, a Ukrainian born hustler who started out selling theatre tickets and washing windows, may finally be losing his prized teflon coating if he is being forced to sell.
The billionaire, along with one of his key lieutenants Alexey Kuzmichev, became a British tax resident in 2015 even after Putin had requested that investors pay Russian taxes on profits they receive on holding companies registered abroad.
The key to Fridman keeping on side of the Kremlin has always been his suave partner Petr Aven, who joined Alfa in 1991 after serving as Russia's foreign minister.
Aven regularly meets with Putin at the President’s Novo-Ogarevo residence and was even conferred with a state award for corporate citizenship personally by Putin in May last year. Boris Berezovsky, who was once known as the Godfather of Kremlin, admitted that it was Aven who introduced him to Putin.
Though Fridman is not in Putin’s inner circle, he has managed to avoid the fate of some other 1990s’-era oligarchs like Mikhail Khodorkovsky and Vladimir Gusinksy, who have had assets seized and have been exiled after failing out of favour.
A former Alfa executive told bne IntelliNews that Fridman and his partners were allowed to keep the $14bn proceeds of their sale of TNK-BP offshore. “Abramovich was allowed to keep his proceeds from the sale of SibAl and Sibneft, and Fridman/Alfa were allowed to too,” said the former Alfa executive. “This is probably driven by their personal relations with Putin.”
Those personal relations may have broken down irrevocably now that Fridman has put most of his eggs in a Mayfair basket.
LetterOne, his UK-based investment holding, has been busy ploughing the TNK-BP proceeds into overseas energy, telecom and technology assets like ride-sharing app Uber. The fund spent $1.6bn on E.ON’s oil and gas assets in the North Sea only after the UK government forced it to sell its North Sea fields in the country because of the risk of facing Russian sanctions.
On December 4, it was disclosed that Fridman's oil firm DEA, which is controlled by LetterOne, is to acquire Sierra Oil & Gas in Mexico for a reputed $500mn.
Pamplona Capital, a UK private equity fund backed by Fridman, has also been snapping up assets in Europe and the US. The Mayfair-based firm, which also has a New York office, last year closed its fifth buyout fund at €3bn. Current investments from Pamplona’s fourth fund include a majority stake in Hungary-based pet food manufacturer Partner in Pet Food, which the firm bought from rival buyout shop Advent International for €315m in April 2015. It also tried to acquire Dr Martens, the boot maker once favoured by punks and skinheads.
Another reason for Fridman to dispose of his bank now could be the increasing spotlight from the Mueller investigation into mysterious online communication between Alfa Bank's computer server and a domain tied to the Trump Organisation during the 2016 election.
Alfa's lawyers have strenously denied the lender had any connection to the Donald Trump's campaign but one senior insider confessed their servers may have been hijacked by a Russian rogue player without their permission.
At the recent Russia Calling forum in Moscow, Kostin noted that Alfa Bank is a kind of business card for private banking in Russia its culture is very different from the VTB business culture, so a potential consolidation of the two banks would be "very difficult."
Gazprombank, Russia's third-biggest lender, may ultimately be a better fit for Alfa and may have the war chest to pay for it.
The secretive bank, which is known to be staffed by many former FSB intelligence service operatives, is run by Andrey Akimov, a close St Petersburg ally of Putin since the 1990s.
Akimov, who has never given an interview on the record, likes to drive a Tesla Model S sports car around Vienna, according to a Bloomberg News report.
Gazprombank, which started in 1990 as an institution focused on catering for Gazprom, has grown to serve more than 45,000 corporate clients. The bank does relatively little retail banking so bolting on Alfa’s huge retail portfolio will mean less overlap.
On December 4, the lender raised its 2018 profit forecast to RUB40-45bn from RUB30-35bn rubles.
The bank still has the significant heft of Russia’s gas export monopoly behind it. From January to September 2018, Gazprom, which owns 46% of Gazprombank's ordinary shares, issued unlimited interest-free subordinated deposits to the bank for 15.5bn rubles.
An acquisition of Alfa by a state player could be the final nail in the coffin for independent banking in Russia and would be ruinous for consumers and small to medium-sized businesses
Russia’s financial sector has again been roiled in the past two years by sanctions and a slide in commodity prices. Other major private banks such Bank Otkritie, Promsvyazbank and B&N Bank have blown up and have had to be rescued by the state.
The winner in the shakeout has been the state behemoths Sberbank and VTB, which have seen their market share and profits rocket.
Aven predicts the Central Bank’s clean-up of the sector will see the number of lenders shrink further to about 300 in the next few years from 500 now but he fully realises that Alfa won’t benefit.
“In general, the banking system is healthy - largely thanks to the Central Bank, which provided it,” Aven told a lecture at the prestigious MGIMO university in April this year. “The main problem is the share of state-owned banks, which control 72% of assets.”
With additional reporting by Ben Aris