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By John Helmer in Moscow

State-owned maritime fleet leader Sovcomflot is making a last-ditch bid to reap value for its bonus-holders before the Russian presidential election on March 2. But the lack of time isn’t the only catch.

Sovcomflot ‘s bid to buy out minority shareholders of Novorossiysk Shipping Company (Novoship) has been rejected by Moscow investment bankers and brokers as too low. The Sovcomflot offer was issued on January 10, with a $3.34 price tag per voting share. This was initially estimated as a 12% premium on a previous floating average, and was reportedly advised by Sovcomflot advisor, Morgan Stanley. But the premium has already shrunk to 5% on current market valuations.

“We do not recommend that Novoship’s minority shareholders accept Sovcomflot’s offer because the offer price is lower than our fair value,” reports Moscow-based Finam Investment Company. Its advisory to investors said they should retain their shares in the expectation of a much higher market value and share price, if and when a proposed IPO is launched by Sovcomflot. Finam says it values Novoship shares at $3.61 — 8% more than the current offer.

In its assessment, Renaissance Capital advised current Novoship shareholders to continue holding their shares, or buy more. “We reiterate our BUY rating for Novoship prefs, and caution owners of the ordinary shares of the potential mandatory buyout offer,” according to RenCap analyst, Eduard Faritov.

Kremlin approval for the consolidation of the state’s majority shareholding in Novoship was granted in June, after two years of bitter infighting between government ministers and Igor Shuvalov, a presidential assistant who is currently Sovcomflot’s board chairman. Shuvalov and Sergei Frank, the Sovcomflot chief executive, are the biggest of the likely beneficiaries from the increase in Sovcomflot’s capitalization, and the value of a subsequent initial public offering.

The infighting with their rivals and critics continues in the High Court in London, where Frank is claiming half a billion dollars in compensation for vessel sales by Sovcomflot, despite an audit he commissioned from Moore Stephens that found the transactions to be lawful and market-value.

Frank told a London newspaper last April that he wanted to float 20% of the company, “benchmarking ourselves against the stock market.” But President Vladimir Putin’s signature on the June decree put a spoke in this wheel by labelling the combined assets of Sovcomflot and Novoship “strategic”, according to Russian law. This bars privatization unless the Kremlin issues another decree removing the designation.

At the time of the decree, Frank’s predecessor as CEO, Dmitri Skarga, told Fairplay: “the decree locks up the two companies’ capital for several more years, and prevents the one thing that drove the consolidation plan for the past few years — cash from a foreign share sale. As usual, the state gets nothing, only the empty shares of Sovcomflot, and will lose the real asset, Novoship.”

This month’s Sovcomflot share offer was defended by Frank at a briefing for analysts on January 15. RenCap reports him as saying that Novoship will remain a public company with a freefloat, indicating that in case Sovcomflot gathers sufficient ordinary shares from its offer — roughly half of the 9.66% currently in the freefloat, which is the target of the buyout offer announced earlier — then a mandatory buyout of the ordinary freefloat will follow, according to Russian law. Non-voting preference shares are not being purchased in the current bid, and will remain in the free float.

Frank told the Moscow equity analysts that, leaving the Novoship preference shares in current shareholder hands will preserve a Novoship free float of 18%. Novoship will also remain a separately listed share, and will not be consolidated into a single Sovcomflot share, he said.

Frank also claimed that his takeover and buyout would realise significant revenue and cost advantages for the merged company, through joint purchasing (bunker fuel), cheaper debt financing and the reduction of administrative expenses (both companies now operate offices in London).

First Deputy Prime Minister Sergei Ivanov, who is in charge of maritime sector policy, refused to say if he endorses the buyout, or the proposed IPO. Ivanov’s reluctance is a signal that Frank may be replaced at Sovcomflot, before the IPO is approved. This week, Frank told the analysts the parameters and timing have yet to be decided. Last month, he acknowledged that he is uncertain about his own standing in the political changes that are coming.

Alexei Bezborodov, a Mosow maritime analyst, told Fairplay that investors face a two-edged risk. “On one side, it is fair that if Sovcomflot will go to IPO, it may significantly gain in share price. On the other hand, there is the risk that, before the IPO, these minority Novoship shares will be converted into Sovcomflot shares on some basis, and nobody has yet said this basis will be fair. Thus, there is risk that the novoship shares will lose value. Besides, nobody knows when this IPO will happen and we know there are a lot of problems with making it.”

The buyout offer will last for 70 days. If Sovcomflot gathers a total stake in Novoship of 95%, the threshold for the mandatory buyout will then be triggered. According to one analyst’s report, Frank said the price of the mandatory offer would not violate minority shareholder rights, so as to avoid problems during a possible IPO.
Despite a sharp correction in Russian stock prices on Wednesday, Novoship has gained 8% on the week since Sovcomflot released its bid.

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