Category Archives: SCM

Privat seizes Dniproblenergo

Figures connected to Ukraine’s powerful financial-industrial group Privat seized the offices of electricity distributor Dniproblenergo on Friday, in a move reminiscent of previous Privat-led corporate raids against the downstream oil company Ukrtatnafta and the power generator Dniproenergo.

The Dnipropetrovsk-based Dniproblenergo (the “obl” in the middle comes from oblast, meaning “regional”) is Ukraine’s largest power distributor, providing electricity to about 24 thousand enterprises — around 27% of Ukraine’s consumers.  The state-owned Electricity Company of Ukraine (EKU) controls 75% of the firm, with the Cyprus-based Larva Investments Ltd (a part of the Energy Standard group) owning 15.9% and the remaining 9.1% in the hands of minority shareholders.  This last category includes 3 shares owned by the Privat-connected company Business Invest.

Andrey Martinyuk, the director of Dniproblenergo from 2005-2006, was elected to return as head of the company after board changes made at an April 30th shareholders’ meeting attended by EKU and Privat and held at Dnepropetrovsk’s Palace of Culture. The government’s securities and exchange commission declared the meeting invalid, but Martinyuk continued to assert his legitimacy to the post.

At 8:00 AM on Friday, a few dozen guards from the Privat-controlled private security firm B.O.G. (an acronym for “Security. Protection. Guaranteed.” spelling the Russian word for God) broke into Dniproblenergo’s offices.  According to Kommersant’s account:

Plowing through the gates [to the office], they neutralized [Dniproblenergo’s on-site] security, broke through doors and forcefully ejected the company’s general director Edward Sokolovskiy from the building. Upon arriving on the scene of the altercation, the police were presented with a July 25th ruling from the Zhovtneviy district court of Dnipropetrovsk [declaring] the naming of Andey Martinyuk to the post of general director as legal.

Dniproblenergo’s chief accountant apparently escaped from the raid, managing to take away with her the firm’s official seal.  (Stamps are a big deal for organizations in Ukraine.)  Despite this, Martinyuk is proceeding as if under complete control of the company.

EKU, whose president is the former financial director of the Privat-controlled oil company Ukrnafta, supports the move, citing poor financial performance as the impetus for the change in management.  Martinyuk, the state electricity company’s choice for a replacement, had been the director of EKU’s distribution department.  The Fuel and Energy Ministry is also on-board with the seizure.

The ousted Sokolovskiy, who is connected to Rinat Akhmetov’s DTEK, accuses Privat and EKU of collaborating in an unlawful attempt to replace him.  He denies financial problems, saying that the raid “could be connected to the fact that in 2007, the company increased its profits by 7.5 times — to UAH 86.8 million [$18 million].”  This figure does not match other reports claiming that the profits for 2007 stood at UAH 28.3 ($5.9 million).

The press office of Alexander Turchinov, Yulia Tymoshenko’s first deputy prime minister, announced that the seizure would be examined by a government commission this week.  A statement circulated by his office said that “We will make efforts to prevent raiders attacks by the side of the Privat group.”

The same security firm was used in the October 2007 seizure of the Kremenchug offices of Ukrtatnafta, where once again a former head of the company was reappointed under the guise of saving the firm from financial ruin.

In March 2008, B.O.G. led an attack at Dniproenergo but the raid was expected and rebuffed under the presence of the press.  The fate of the electricity generator remains in limbo, as Privat, Rinat Akhmetov, Tymoshenko and President Yushchenko all have interests in the matter.

Kommersant ends its article by listing a couple of other sites that may fall victim to Privat-led seizures, including the Crimean Generator Systems, Luganskteplovozu and the Dnipropetrovsk (sunflower seed) oil extraction factory TM Oleina.

As the Ekonomicheskie Izvestia article sums up,

Dneproblenergo, together with Dneproenergo and a range of other energy-providing companies, is one of the objects of conflict in the protracted battle [conflict] between the current leadership of the Fuel and Energy Ministry on the one hand and, on the other, the management of the energy companies that was appointed during the period of [former PM] Viktor Yanukovich’s government.

The tactics in this battle include moves such as these dramatic corporate raids, gerrymandered shareholders’ meetings, control over the physical shareholder register, competing judicial decisions and proxy confrontations in the political spectrum.

Of course, while they may make for interesting reading, such events are not very helpful for Ukraine’s business world…


Akhmetov’s SCM weighs in on Dniproenergo: Kolomoisky is no “Robin Hood”

Yulia, don't steal, Dniproenergo for the people!

A walk through Kyiv shows that the fate of Dniproenergo is far from sealed, as PR posters from both sides of the conflict continue to pepper the city. (The majority seem to be anti-Privat, however — more pictures appended at the end of the post).

A decision earlier this month by Ukraine’s Supreme Court deemed a debt-for-equity plan instituted last year at the major electricity producer illegal:

The controversial restructuring plan that was struck down saw the state’s share lowered to 50%+1 through a supplementary stock issue that resulted in magnate [Rinat] Akhmetov’s Donbass Fuel and Energy Company (DTEK) gaining control of about 44% in Dneproenergo. DTEK, in turn, agreed to pay about $10 million, take on the company’s loans totaling around $200 million, and provide another $200 million in investment.

The shareholders had accepted this agreement and it was recognized by the government’s securities and stocks commission. However, Dniproenergo’s registrar, Ukrneftegaz, refused to amend the company’s shareholders’ register. Ukrneftegaz is controlled by Privat, a key owner of which [Igor Kolomoisky] recently expressed frustration at the manner in which Dniproenergo’s share issue had been handled. [The Mirror Weekly has an excellent rundown of Privat’s use of shareholder registers in various corporate management disputes.]

A Privat-affiliated company and minority shareholder in Dniproenergo (owning 257 shares, or 0.00655%) launched the lawsuit against the restructuring plan, culminating in the [April 8th] Supreme Court ruling.

While this decision paved the way for Prime Minister Yulia Tymoshenko’s privatization plan for the electricity generator, President Yushchenko soon after halted the implementation of Tymoshenko’s vision.

The court ruling also threw Dniproenergo’s financial status into jeopardy, as the company once more finds itself in bankruptcy.

Ukrainian breakthrough, Dniproenergo for the people

Last Wednesday Dniproenergo sent an open letter to “the country’s leadership,” namely Yushchenko, Tymoshenko, and Rada Speaker Arseniy Yatsenyuk, pleading for intervention from the government and a return to the way things were before the Supreme Court decision.

The inclusion of the political angle gives the dispute further depth. Not only do we see a battle between the businesses of two of Ukraine’s richest men (Akhmetov is #1, Kolomoisky is #3), but also a continuation of the near-constant conflict between Yushchenko and Tymoshenko.

She needs these privatizations to proceed in order to pay for her ambitious social programs. He has intimated that her privatization docket is set up to unfairly benefit certain political supporters.

The disagreements have led to a nasty battle over the leadership of the important State Property Fund.

From the Eurasian Daily Monitor:

Yushchenko canceled Tymoshenko’s orders to replace the head of the privatization body, the State Property Fund (FDM), and to privatize one of the last big factories still remaining in state ownership, the Odessa Portside Plant (OPZ). Tymoshenko, with the courts on her side, disobeyed and instructed her subordinates, perhaps for the first time ever, to ignore Yushchenko’s orders. Yushchenko sent his guards to protect the FDM from Tymoshenko’s team, and confrontation between the Presidential Guard and police was barely avoided.

An even larger conflict is looming, as both Yushchenko and Tymoshenko envision constitutional reform that would sway the balance of power to their respective branches of government.

Cases such as the Dniproenergo are a good example of how allegiances overlap, transcending political boundaries and affecting billion dollar businesses.

I had earlier translated sections of an interview given by Privat‘s Igor Kolomoisky dealing with the ongoing Dniproenergo dispute.

Last week Oleg Popov, the general director of Akhmetov’s holding company System Capital Management (SCM), gave a wide-ranging interview to Kommersant. In the interest of providing equal time, here are excerpts from the interview dealing with the Dniproenergo disupte (my translation):

– Have you already made a decision on how you will contest the Supreme Court’s ruling on Dniproenergo?

First we should see it and read the justifying section (мотивировочная часть). For two weeks we haven’t yet seen it. But I figure that we have, as the lawyers say, “a very strong case,” so most likely we will contest the decision and stand up for our rights in court. We’re sure that nothing was illegal.

– Will you contest it anew under open circumstances or in a European court?

That will depend on the justifying section.

– Are you planing on refraining from investing in Dniproenergo in connection to this decision?

The government doesn’t have an issue with the quality and process of the [debt-for-equity] rescue plan [санация] for the enterprise. We remain willing to invest in the facility, if such investment is deemed necessary by the enterprise and the government.

– Is it possible to talk about the political motivations of this decision?

Of course not! Take a look at what essentially took place. You’ve got a minority shareholder–a representative of Privat Group which sued the company Dniproenergo, contesting the supplementary share issue and the conducting of the [shareholders] meeting. They claim that their rights were allegedly infringed upon by us conducting this supplementary issue. That is, this case is exculsively between two business entities over the legitimacy of the conduction of a shareholders meeting and other procedures of the rescue.

Everything else–that’s PR from Privat, talk of “justice” [справедливость] and “the interests of the government.” What do we see here? A very simple picture. We have people who are interested in satisfying their personal interests and recollecting [восстановить, renewing] their “justice.” What interest Privat has, I’m not exactly sure. But judging by the numerous crusades for “justice” undertaken by Privat, for example the case with the Nikopolsky ferroalloy plant (NZF), all these discussions on “justice” and “the interests of the people” end once Privat gets commercial participation in a project. And by no means competitively. [И отнюдь не на конкурсе.]

– Yes, but the co-owner of Privat Igor Kolomoisky says that he is fighting for justice…

Do you want to call him Robin Hood?

– He so named himself in an interview with the internet publication Ukrainskaya Pravda…

I don’t see around him the large number of admirers that typically surround a people’s hero, standing up for justice.

– Mr. Kolomoisky levied accusations against you claiming that the permission for Energy Company of Ukraine (EKU) to vote for the rescue was given by [then] Prime Minister Viktor Yanukovich. By doing so, he played into Rinat Akhmetov’s hand as a shareholder in Dneproenergo…

We never used any preferential treatment from the state regardless of who was leading the government [i.e. the PM]. Moreover, the rescue plan was approved not by the [PM-controlled] Cabinet of Ministers, but by the Zaporizhye regional business court [where Dniproenergo is located]. We didn’t have any preferential treatment in relationship to other participants of the the tender on the conduction of the rescue. Anyone who wanted to propose their own rescue plan, they proposed it. The creditors chose our proposal since we propsed more money and the instant repayment of [Dniproenergo’s] debts. We didn’t have any preferential treatment and we don’t want to have any in the future. If we will have it, we can become weak and uncompetitive. No one needs this, above all our shareholders.

– Then why did you decide to carry out the rescue exactly in last year?

If the enterprise hadn’t recovered during 2007, then from Jan. 1st, 2008, it would have gone under the hammer [i.e., to auction]. We at that moment were minority shareholders, owning 18% of the shares in Dniproenergo. We had a goal: provide long term growth to the worth of the enterprise. We were and remain interested in its financial health. We, as creditors, were invited to participate in the competition for the rescue, and we won it. We proposed a real plan of action, invested the money, saved this enterprise and are prepared to invest further. But shareholders, who have about 2 or 3 shares, are dissatisfied with the situation and launched countless legal actions in order to turn everything around.

– Igor Kolomoisky stated that Dneproenergo didn’t settle up the debts with his companies. That, in principal, is the reason that he gave for the current conflict. Is that so?

That’s not true. Dneproenergo fulfilled its debts to all its creditors, at least those who have been able to support their claims, which would include Privat if they were in the register [of debts].

– According to you, the state is not at all participating in the Dneproenergo case?

As concerning state organs, as far as we know, they don’t have an issue with the rescue of the enterprise and our participation in it. The state doesn’t take part in court processes and doesn’t initiate them. Attempts to win back [отыграть] the situation and return Dneproenergo into bankruptcy are being carried out only by Privat. It’s them [Privat] that has an issue.

– Then how would you comment on the fact that the Vice Minister of Justice Evgeniy Korniychuk predicted the results of the case two weeks before hand?

(Pause.) At a minimum, it’s strange. If you take into account that the government organs don’t have any claims to us, because they are not involved in the court process, then it is strange to hear such a statement.

– According to our information, Mr. Korniychuk also met with the Supreme Court judges on the day the decision was given.

(Pause.) You asked me [earlier in the interview], what other problems exist in conducting business in Ukraine. If your information is correct, that speaks to the fact that judicial power, which should be independent, appears [is, является] not to be so.

– Returning to the claims of Mr. Kolomoisky against you. He says that the $400 million that you paid is too small for the 28% of shares that you got.

When we made the decision to take part in the rescue of Dniproenergo, the total worth of Dniproenergo on the PFTS [Ukraine’s major stock exchange] was at the level of about $460 million. We proposed to pay and paid for the supplementary shares based on an assessment of the entire enterprise to be worth $1.2 billion.

– Then why did Mr. Kolomoisky value only the share you received at $1.2 billion?

Probably his managers simply got confused during the calculations.

– Nonetheless, the shares of Dniproenergo rose in the last year, and now the share packet that you received is worth, based on the PFTS quotation, $626 million.

Let me tell you a another story. Do you remember Krivorozhstal? (He draws a picture with two scales, Time and Worth.) If we take 2002, 2003, 2004, 2005, 2007. We skip 2006, because then nothing happened. In 2002-2003, metallurgy was stagnating. The estimated value of all the metal enterprise groups (меткомбинаты) in the world was not very high. Upon reaching 2004, a medium-term growth tendency was noticed for metallurgy. In this year we took part in the competition for Krivorozhstal and won it, paying $800 million. In connection to the fact that the political situation in the country changed, in 2005 that enterprise went through a re-privatization process, and it was sold at auction for $4.8 billion. Mitall Steel won.

Two years pass. The world metallurgy market is now rising and growing at a quick tempo. Now Krivorozhstal is worth $15 billion. What are we to do with it? Where is the justice? If guided by the logic of 2005, then maybe the government ought to once again re-privatize the metalworks factory? And sell it for $15 billion, returning $4.8 to Mittal Steel? In two years, Mittal couldn’t do anything that would make the worth of the enterprise grow at such a rate. Indeed, the company’s growth in value was in connection to the entire industry–the market for iron ore and steal also grew. So would it be just to sell it again? Is a third time necessary? Would that be just?

If we are going to operate not based on an understanding of law, but on an understanding of justice, you can hardly talk about their being clear rules of the game for investors in our country. And you can hardly say that we have an attractive investment climate.

Note: I have at times switched between spelling the company “Dniproenergo” and “Dneproenergo.” These are the Ukrainian and Russian transliterations, respectively. It is spelled both ways in the media, depending on the language of the medium. While I tend more often to use the “i” variant, I like to include the spelling with “e” every once in a while in order to help pick up search engine-driven traffic. Such is the prerogative of a blogger.

Private money vs. Just [fair] law


In front of TGI Fridays…

Stuck in traffic in front of the club Avalon