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By John Helmer in Moscow

After selling out of its container business, the Far Eastern Shipping Company (Fesco), owned by Sergei Generalov (right image), has announced it is taking an August time-out, and will return in September with an announcement of its “near-term strategy”. It isn’t known where Generalov will take his holiday, but if it’s Fantasy Island (left image) the financial details of Fesco’s reorganization and the terms Generalov has apparently accepted to continue in business will require a strong dose of reality to be understood. Since the heavily indebted, loss-making concern has been unable to date to arrange share sales to strategic or ordinary investors, it has been covering its debts by selling off assets, reducing substantially its fleet operations and eliminating much of its port terminal business.

According to the last audited financial report from Fesco, dated October 9, 2009 and covering the first six months of that year, the shipping business accounted for 32% of group revenues, while the port and container terminals represented another 11%. Fesco’s sell-off this year appears to have targeted these two divisions, leaving the liner and logistics division (45% of group revenues) and railway services (20%) for the future.

Since that financial report, Fesco has terminated its auditor Moore Stephens, the maritime specialist, and replaced it with KPMG. The last time Moore Stephens presented a report on the state of the company, it warned that serious losses Fesco was running and the writedowns it was obliged to take, had caused liabilities to run $244 million beyond assets. According to the auditor, there was “material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.” Moore Stephens also revealed at the time that Fesco had been obliged by the global fall in vessel value to mark down fleet values below the level required by two ship mortgage loans.

Fesco made several new disclosures at a briefing for selected Moscow brokerage analysts held this week by company spokesman, Stanislav Vartanyan, and board chairman, Kirill Rubinsky. They confirmed that the sale of Fesco’s half-share of the National Container Company (NCC) to associates of First Quantum, owned by Vitaly Yuzhilin, has already realized a payment of $800 million in cash, and that another form of payment is being negotiated equivalent to $100 million in order to complete the transaction.

Generalov and Yuzhilin have been fighting over management, control, and sale price for two years. Fesco reportedly paid $375 million for the half-share in NCC in 2007, but Generalov and Yuzhilin were unable to see eye to eye. Early this year, it was reported by industry sources that Yuzhilin had offered Generalov $440 million for the stake, a price Generalov said wasn’t enough. The latest price, on which the two antagonists appear to have finally agreed, is more than double the reported offer price. This has raised curiosity among Moscow investment bankers over how much of the sum will go towards paying down Fesco’s debts. The sources admit to asking why the asset should have appreciated by so much during the collapse of the container trade, and at a time when the revival of the business in Russia remains uncertain and volatile.

Alexander Kazbegi, the shipping analyst at Renaissance Capital, reports to clients that he has not valued the NCC stake at more than $800 million, and judged the announced transaction a good deal from Generalov’s point of view. Kazbegi adds that he believes Fesco has been intentionally delaying the release of its financial statements for last year until after this transaction. With its loans “still in technical default,” Kazbegi writes, “FESCO is likely to benefit from a quick resolution of its debt restructuring, which would also enable the company to publish 2009 IFRS financials and return to business as usual.”

According to the Renaissance Capital report, “NCC comprises First Container Port (FCT) in St-Petersburg; NUTEP in Novorossisk; and Shushary and Ust-Luga, near St-Petersburg. FCT handles more than two-thirds of all containerised imports to Russia and reported a 32% increase in throughput in 1H10 vs 1H09; NUTEP handled about 12% of FCT’s cargo, while Shushary and Ust-Luga are still in the development stage. Assuming that NCC increases its overall turnover approximately 30% in 2010 to 1.65 TEU, and generates about $150-175mn in EBITDA, the price of NCC would imply a 2010E EBITDA multiple of 10.5-12x (assuming no debt; while this is improbable, we think debt is likely to be low), or twice the NCSP multiple and in line with EMEA container port operators – a good price, we think.”

At the Fesco briefing on July 26, the company suggested the selling price for the NCC stake represented a multiple of 15 times earnings; this suggests that Fesco was expecting lower earnings from the container terminals than Kazbegi has calculated. If that is correct, what business calculation can be attributed to Yuzhilin — by all accounts a tough customer in bargaining — to warrant paying $460 million more than he thought the asset was worth six months ago? The answer to this has also gone to Fantasy Island for a holiday, and may be clearer in September.
 

This month also Fesco says it has sold the Fesco-Sakhalin to Sovcomflot; a high $80 million price has been paid, the executives said, for the 5-year old, Aker-built icebreaker and supply vessel. Alexei Bezborodov, a leading maritime analyst in Moscow, and publisher of Infranews.ru, the Russian industry bible, told Fairplay he believes “there is nothing unusual with the price – it seems to be normal.”

Fesco now believes it has more than enough cash to clear its obligations, which the executives estimate to have been $670 million at June 30. The sell-off of vessels and container terminals also relieves Fesco of having to find share-buyers for the company’s treasury stock, amounting to 13% of the issue.

The surviving company fleet now comprises 47 operating vessels, and 4 under construction in China. As most of Fesco’s remaining fleet and port business is now concentrated at Vladivostok and Khabarovsk, in the Russian fareast, the company says it is thinking of buying more shore and port assets there, and adding to its railcar fleet.

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