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By John Helmer in Moscow

Russia’s ports used to be run by gangsters, because it was one of the easier assets in post-Communist Russia to control by simple violence. The history of the International Longshoremen in the US and Jimmy Hoffa’s Teamsters make this feature of port life unexceptional the world over.

If the Russian aluminium wars are famous in the West, the Russian port wars, less famous, were more violent. Everyone knows what champions of probity (make that ‘champion’) emerged from the aluminium wars. But until yesterday afternoon it wasn’t so clear which champion would come out on top in the ports.

The announcement to the London sharemarket and to the press makes a farce of what has really happened. According to the statement of Novorossiysk Commercial Seaport Company (NCSP is the London ticker, NTMP is the Russian), “the Novorossiysk Commercial Sea Port Group hereby announces the preparation of the transaction to acquire 100% of ownership (charter capital) in Primorsk Commercial Port LLC in the course of implementing its previously announced investment and development strategy to diversify and expand its business…As a result of the transaction it is supposed that NCSP Group will integrate the largest port operator in crude oil handling in Russia. Combining the capacities of Novorossiysk and Primorsk ports will allow creating the largest stevedoring company in Russia.”

That sounds like a takeover by Novorossiysk of Primorsk.

Then the Novorossiysk boys go on: “The transaction to acquire 100% ownership of Primorsk Commercial Port LLC is conditional on the sale of the controlling stake in PJSC NCSP by its controlling beneficiary owners to the beneficiary owners of Primorsk Commercial Port LLC – the OAO Transneft and Investment Group Summa Capital.”

That sounds like a takeover by Primorsk of Novorossiysk. But so that the transaction would be as transparent as possible, and the market would be quite clear on who would take control of the two port companies, this line was added: “The final documentation and terms of the transaction have not been agreed presently.”

If Novorossiysk wanted the market to think it had initiated the move, this line almost certainly suggests otherwise. It looks like whoever is taking control at Novorossiysk by buying the current control shareholders out has been unable to get the sellers to agree. There weren’t many London shareholders who, if they understood what was going on, believed the announcement meant a merger on terms favouring their share price. The selling of Novorossiysk has started; and in the first hours of trading after the news broke, the price was down 1.1%.

Novorossiysk is the largest port on the Black Sea; the largest port in Russia (ahead of St. Petersburg); and the fourth largest port by volume in Europe. Almost 87 million tonnes of cargo go in and out of the port each year; most of it (58 million tonnes last year) is crude oil and petroleum products. The port company has been publicly listed on the London Stock Exchange since 2007 – the only Russian port to be accountable in that fashion to public shareholders. The controlling shareholders are Alexander Ponomarenko, Alexander Skorobogatko, and Arkady Rotenberg.
 

Primorsk, on the Gulf of Finland, is the largest specialized oil shipping port in Russia, and one of the largest in the Baltic Sea region. Last year it shipped 75 million tonnes of crude. It receives the oil by Transneft’s pipeline system from oilfields in the hinterlands.

The men who control Novorossiysk and Primorsk aren’t famous for what in the precincts of the London Stock Exchange is called corporate governance or transparency. A statement by NCSP of its governance and accountability policy says that it “adheres to Russian laws, Russian and international best practices and business ethics standards, taking into account the interests of all stakeholders… The objective of corporate governance is to provide effective and responsive control over company operations, mitigate risks, maintain and improve financials, and build a positive business image for NCSP Group.”
 

The three controlling shareholders at Novorossiysk — Ponomarenko (right image), Skorobogatko, and Rotenberg — exercise their 50.1% control through a Cyprus company called Kadina, which is a strictly private affair. Although Skorobogatko is a member of the Russian parliament with a deputy’s duty to answer public questions, he doesn’t. They exercise their 50.1% control through a Cyprus company called Kadina, which is a strictly private affair. When it comes to understanding the affairs of private Russian companies, it is often useful to observe if the shareholders can button their collars when they tie their ties.

A bloc of 20% of NCSP is owned by the state, and is slated for privatization. About 30% of the shares are free floating, according to the latest company documents; about 25%, if the stake held on trust by Russian Railways is subtracted.

The Russian Railways system, which can choke the port to death by its control of the railways in and out, exercises de facto control through the state shareholding, formal trust arrangements, and word of mouth undertakings from the Railways boss, Vladimir Yakunin. Transneft, the state oil pipeline company, can also throttle Novorossiysk port by withholding the flow of crude oil, and it also controls Primorsk port, the apparent buyer of Novorossiysk in the new deal. Nikolai Tokarev, the boss of Transneft, made a public record last December that he was gunning for Ponomarenko. The deal announcement means that he’s hit his mark.

Another control figure in the background is Gennady Timchenko. He is the largest single trader of Russian oil through the Gunvor trading group. His ambitions to control many other elements of Russian oil transportation – railways on land port terminals on the seabord, and tankers on the high seas – are a matter of public record, and in the transcripts of evidence in the UK High Court. Timchenko has a big stake in the construction of petroleum export terminals at Novorossiysk and Ust-Luga, on the Gulf of Finland. The High Court records suggest that nothing significant happens in the movement of Russian crude oil and petroleum from wellhead to tanker without Timchenko’s cognizance.

All this having been said, it is quite impossible for the state not to have decided who will control Novorossiysk in the next stage. And the official in charge of state policy on ports and oil movement is Deputy Prime Minister Igor Sechin. His involvement with Timchenko and Tokarev in reorganizing the Russian oil and maritime concessions is so well known, it doesn’t bear repeating here. What looks to have happened in this case is that Sechin has done to the two ports what he has already pulled off with the two oil tanker companies, Sovcomflot and Novorossiysk Shipping Company – he has arranged the re-nationalization of Novorossiysk port and its consolidation with Primorsk into the national champion of oil ports. Whether other oil export outlets, such as Ust-Luga and Kozmino on the Pacific seabord, will eventually be brought into the monopoly remains to be seen.

There are bound to be those appearing on the Kremlin Wall – President Dmitry Medvedev and Finance Minister Alexei Kudrin, for example – who will be unable to explain how their modernization and reform steamroller managed to take this direction while they were at the steering wheel. They may justify the nationalization as a step towards a later privatization of both Transneft and the expanded port company. But they are dreaming. These assets are intended for other hands than those two control.

Kirill Kazanli, the maritime analyst for Troika Dialog, calls the deal a “gentle nationalization”. Just how gentle – read profitable — is not an assessment Ponomarenko, Skorobogatko, or Rotenberg will either endorse, or share with other shareholders. Calls to their offices have all been rebuffed with refusals to say anything.

Kazanli’s calculation is that the pricing of the takeover will not provide much of a reward for the offshore minority shareholders of NCSP. “Primorsk Commercial Seaport is first and foremost a crude and oil product terminal,” Kazanli reports in today’s Troika Dialog Russia Market Daily. “Crude volumes going through Russia’s northwestern ports are unlikely to show sizable future growth, as West Siberian crude reserves are nearing depletion.”

Kazanli goes on: “There is the prospect of dilution if Novorossiisk Commercial Seaport chooses to conduct an SPO to finance part of the transaction (the company’s $409 mln in cash and liquid investments at end 1Q10 will not be sufficient to cover the deal, in our view. Also, 25% of the company will belong to Transneft, the core competence of which does not include running a diversified port company; we do not know much about Summa Capital); hence, the port company’s investment program may come under question. Apart from the larger scale, we find few synergies for Novorossiisk Commercial Seaport with this transaction and believe that the purchase will add little to the story’s growth element. Our initial reaction to the news is negative.”

Uralsib Bank thinks the transaction is being done on Tokarev’s terms, and so will benefit Transneft shareholders. Last year, Tokarev announced that he valued Primorsk at $5 billion. “We view the deal as positive for Transneft,” reports UralSib, “which appears to be developing at a steady pace. It may also decrease the chances of Transneft privatization, as in addition to the pipeline system, the company controls strategic infrastructural assets, including the Primorsk and Kozmino ports, and will add Novorossiysk Port to its portfolio.” Tokarev’s spokesman refuses to answer questions.

Ivan Kim, the transportation analyst at Renaissance Capital starts with the obvious: “We are cautious on the impact for minorities at this point, given that the financial details and deal structure are not clear.” He then takes cover in the murk: “The reason for the sale of NCSP by the controlling shareholders is not clear and we suspect it might be political, especially given Transneft’s role as the main supplier of oil to both ports and its veiled conflict with Kadina over the ownership of oil terminal Sheskharis at NSCP. Depending on the asset size of Primorsk, if this amounts to more than 50% of NCSP’s asset value, the deal needs approval of 75% of all shareholders, with those voting against getting the right to a buyout offer, limited to 10% of NAV. Depending on the deal structure, the purchase of the controlling stake in NCSP by Transneft and Summa Capital may not trigger a mandatory tender offer to minority shareholders.”

Independent Moscow maritime analyst Alexei Bezborodov says the deal has taken him by surprise. He was expecting, he said, that Ponomarenko and Skorobogatko would “share” their property, either by selling a stake of their own in a secondary public offering, or through the privatization of the state’s 20% stake. But Bezborodov is certain the new deal now puts the two of them out of the port and stevedoring business.

He is betting their take-home reward will be 50% of a valuation of the port company at $5 billion. A payoff of $2.5 billion compares with the full market capitalization of the company today at just $3 billion. The value of Primorsk is much less, Bezborodov claims – not more than a billion dollars – so that if Ponomarenko, Skorobogatko, and Rotenberg acquire 50% less one share of that, their net profit from the transaction should be $2 billion, payable in cash. That too appears to be dreaming.

Kim of Renaissance Capital is more sanguine, arguing that by the time this deal closes, the valuation of Primorsk is bound to be upped, and the cash payment to the Novorossiysk boys cut down. That, he argues, won’t be good for the public shareholders of NCSP: “While the financial implications for Transneft would depend on the valuation of both assets, it does not seem to us at present that there will be significant financial outlays, given the relative size of the assets. As for NCSP minorities, there is a big chance that NCSP will overpay for Primorsk (as 50% of the purchase is funded by other than Kadina Ltd shareholders), while a changeover of Kadina’s ownership would bring no financial benefits to NCSP minorities.”

The one joker in the pack for all is the figure of Ziyavutdin Magomedov, owner of Summa Capital Holding, which reportedly owns Primorsk port alongside Transneft. Magomedov, 42 and a well-educated fellow from Dagestan, reportedly started out making money in the telecommunications business, alongside the oil trade and other things. His business methods and his wealth have been likened in Russian reports to a fellow Dagestani, Suleiman Kerimov.

For Bezborodov, Magomedov’s group Summa is “the strange hero” on the buyer’s side. About stevedoring, he claims that Magomedov “knows tuppence… No experience, no knowledge.”

Summa’s telephone answering service declines to say if the takeover is hostile or friendly, or to clarify the price. Published records of Summa’s managerial appointments suggest a group of trusted friends with common backgrounds. Timburlat Karimov is said to be the chief operating officer; Marat Shajdaev is said to supervise the oil and gas businesses; Magomed Galaev has been the group’s investment strategist, but it isn’t clear whether he is still doing that. In addition to telecommunications and oil trading, the group is reported to hold lead and zinc mining assets in the Sakha republic.

If Summa is a holding for a group of silent partners, and if Magomedov is managing their interests, then their part in the creation of Russia’s newest champion is likely to be as big as its value is still unknown.

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