By John Helmer in Moscow
A deteriorating personal relationship between chief shareholders, and growing financial pressures on loss-making Far Eastern Shipping Company (Fesco), the Russian multimodal transportation leader, have led to a buyout offer for Fesco’s 50% stake in the National Container Company (NCC), which operates the First Container Terminal of St. Petersburg, the biggest box facility in Russia.
First Quantum, the controlling shareholder of NCC, has offered to pay Fesco $440 million for its stake. Industry sources have told Fairplay that Fesco paid $100 million less when it bought into NCC in 2007. In addition to the St. Petersburg terminal, NCC also owns and operates the NUTEP terminal in Novorossiysk; Ukrtranscontainer in Ilyichevsk, Ukraine; and Baltic Container Terminal, which is still in construction at Ust-Luga, on the Gulf of Finland.
Fesco chief executive and shareholder, Sergei Generalov (see picture), and First Quantum’s controlling shareholder, Vitaly Yuzhilin, have been on worsening terms, according to several Moscow sources. Evidence of their business differences surfaces from time to time, the sources, who follow both Fesco and NCC, say, and these are exacerbated by personal factors.
Yuzhilin is a St. Petersburg businessman, who entered the maritime sector after graduating from the Makarov Naval Academy of Leningrad. He has been a deputy in the State Duma since 1999.
Generalov’s career record has been endorsed by a statement in open court, following libel proceedings Generalov issued in the UK High Court in 2007. Generalov, who worked at the Yukos oil company and the associated Menatep Bank belonging to Mikhail Khodorkovsky, “was never associated with any form of corrupt activity during his time at those two companies”. Generalov and his Industrial Investors holding, according to the settlement of the court claim, “conduct their business affairs in an honest manner.” In addition, Generalov’s counsel reported at the start of the proceedings, “Industrial Investors is a member of the International business Leaders Forum in this country, of which the founder and President is Prince Charles.”
Industrial Investors owns 54% of Fesco. The Swedish fund East Capital Russia and the European Bank for Reconstruction and Development own minority blocs of shares.
Before Generalov bought into Yuzhilin’s NCC in 2006, Fesco’s container line of business represented $18 million worth of sales revenues, just 3% of the group-wide total. Once the stake in NCC was counted, revenues jumped to $150 million on Fesco’s 2007 financial report – 15% of total. The value of the container terminal assets amounted to 19% of the Fesco aggregate that year. In 2008, the last year for which financial reports have been issued by Fesco, these proportions remained roughly the same, while revenue growth in the container division was faster than in Fesco’s fleet, intermodal cargo services, and rail divisions.
Russian industry sources and sector analysts believe Generalov and Yuzhilin have been unable to agree on Fesco’s financial obligations and operating involvement in several NCC projects; they include the new box facility being built at Ust-Luga. NCC spokesman Alexander Voronkov told Fairplay that “NCC has returned to the pre-crisis level of 2008, but we would like not to discuss growth perspectives for 2010 yet, as the market is unstable and shows contradictory trends. We are not partners with Fesco, but rather Fesco is a shareholder of NCC, so we would like to refrain from commenting on [the share buyback].”
Alexander Kazbegi, the maritime analyst at investment bank Renaissance Capital, told Fairplay Fesco probably lost $70 million on estimated earnings (Ebitda) in 2009 of $128 million. The container terminal division earnings for the year Kazbegi estimates at $18 million, down from $90 million in 2008. “Fesco’s fleet is too big and the working capital requirement is draining,” Kazbegi said. “Fesco wanted to sell the fleet and keep the port assets, but that has proved impossible”. Several weeks ago, Fesco announced it had sold five container vessels from its fleet for $49 million. Kazbegi’s assessment is that the fleet is still too big to be affordable.
Fesco did not respond directly to questions. A Moscow newspaper quotes Generalov as saying “the share in NCC is not on sale, especially not for such ridiculous money.” A Fesco spokesman was also quoted in the newspaper as saying Fesco “does not see the necessity for sale of the stake. If the sum of $440 million is to be considered the price for a 50-percent share in NCC, Fesco itself would take pleasure in buying out First Quantum.”