By John Helmer, Moscow
Sovcomflot, one of the largest oil tanker companies in the world, has sought leave to appeal against the rulings, and the trial judge’s dismissal of its first appeal application. The final judgement in the case has been delayed until October.
Sergei Naryshkin (top), the chief of the presidential staff, is also hanging on to his job as chairman of the Sovcomflot board, despite an April 2 Kremlin decree ordering state officials to leave the boards of state-owned companies they have been supervising. Naryshkin is one of the last senior officials not to comply.
Also delayed until the autumn is a hearing by the UK High Court on a new $180 million restitution and damages claim by Yury Nikitin, a fleet charterer and one of the targets of Frank’s litigation. His assets and bank accounts were frozen by the 6-year injunction requested by Sovcomflot. Nikitin was cleared by the court rulings of most of Frank’s charges; under UK law, that allows him to claim against Sovcomflot for the financial losses inflicted by the freeze order.
Although ordered by the court to pay more than ₤15 million in costs and penalties to Dmitry Skarga, Frank’s predecessor as Sovcomflot chief executive, and Tagir Izmaylov (Izmailov), former chief executive of Novorossiysk Shipping Company – both of them vindicated by the court — Frank has refused to compensate his rivals while the appeal is pending.
In Moscow meantime, two official announcements have appeared, suggesting that Frank’s plan to arrange the privatization and sale of at least 25% of the state-owned shipping company will take place this year. This appears to reverse the halt to the privatization reported to have been decided by the government in March .
If it happens, the sale will generate large fees for the underwriter Morgan Stanley; cash proceeds of as much as a billion dollars; and a lift in Sovcomflot’s market value on which participation bonuses may be paid.
An initial public offering (IPO) for the Russian company, whose credibility and liability have been threatened by the High Court, would be unprecedented – if the Financial Services Authority (FSA), the London Stock Exchange regulator, allows it to proceed. But the latest announcements are ambiguous for timing and market location; and government officials aren’t prepared to say where or when the proposed privatization and share sale will actually take place. If not soon, it may be too late for Frank to reap the credit or benefit.
One announcement from the Russian Government is a decree, dated June 29, No. 1103-P, and signed by Prime Minister Vladimir Putin. This says that Morgan Stanley has been awarded the mandate for the sale of up to 25% less one share of Sovcomflot. The Federal Property Management Agency was ordered to sign a mandate agreement with the investment bank. Sources close to the bank and others in Moscow report that Morgan Stanley was approved for the share sale by Deputy Prime Minister Igor Sechin months ago. The official award came in April after offers from several international investment banks were reviewed by the Ministry of Economic Development, which supervises the state property organs.
Section 3(d) of Putin’s order requires Morgan Stanley to report on “possible buyers of shares and… proposals for price and number of shares and other terms of the alienation of shares represented in the Russian Economic Development Ministry and the Federal Property Management Agency.” There is no reference to an initial public offering (IPO) for Sovcomflot, and no permission for the sale of shares to non-Russians.
A second announcement indicates that on July 5 President Dmitry Medvedev signed a decree allowing the issue of new Sovcomflot shares up to 25% less one, but preserving the state stake at 75% plus one share. Sources close to the company and the Kremlin claim the intention is to sell the non-control stake before the end of this year, and another 25% shareholding within three more years. The Medvedev decree has not been published on the Kremlin website, and a full text has not been found in the public domain.
If the first share placement is not an IPO on an open market, the second sale is unlikely to attract open-market investors. Morgan Stanley’s role may therefore be to do no more than give the government an asset valuation, and set the price for the award of the stake to a preferred or strategic Russian bidder. Candidates for that have been discussed in the Russian business press for months. They include Gennady Timchenko, whose Gunvor group has expressed interest in the past in extending its commodity trading portfolio to ports and shipping; Vadimir Lisin, the steelmaker with a port and shipping company he plans to IPO soon; and Ziyavutdin Magomedov, the front-man for recent asset reorganizations in Russian maritime business.
Russian maritime experts say there are inconsistencies between two decrees, suggesting that not everyone agrees on what is to happen next to Sovcomflot, and haste is revealing uncoordination. The presidential decree speaks of the issue of new shares; the governmental decree refers to the sale of existing shares.
The sources also note that the timing for an open-market sale of Sovcomflot shares is already inopportune, because shares of international shipping companies of comparable size have been falling globally. Torm (Denmark) is down 54% from its peak this year; Frontline (Bermuda) is off 50%; Overseas Shipholding Group (US) is down 25%; and Teekay Tankers (US), down 18%. The reason, tanker owners make plain, is simple – the growing supply of tankers exceeds the the current and projected demand for oil cargo transportation.
Sovcomflot deflects questions about shareholding issues to the government as its shareholder. Arina Lazareva, spokesman for the State Property Committee (Rosimushchestvo) refuses to reply to questions for clarification of the ambiguities in the recent decrees and the timing of the proposed privatization.
The press service of the Ministry of Economic Development gave one answer to the timing question yesterday: “The date of Sovcomflot’s IPO will be scheduled after Morgan Stanley carries out due diligence.” Bank sources claim, however, that due diligence has already been carried out by Morgan Stanley and by other banks seeking the share sale mandate. Due diligence is also not quite what Putin’s June 29 order requires. The Ministry then amended its answer and has responded: “The timing and form of sale of the state-owned shares of SCF will be determined on the basis of proposals by Morgan Stanley, the investments consultant. We have received no such proposals yet.”
The implication is that Sovcomflot’s future is hanging on a knife-edge, along with Frank’s. According to sources close to Novorossiysk Shipping Company (Novoship), now legally subordinate to Sovcomflot, the Federal Security Service (FSB) has taken a special interest in answering these questions for itself, and is unlikely to view Morgan Staley as its consultant on who should take control of the shipping company. Frank’s London spokesman Bill Spears declines to confirm or deny speculation about Frank’s future.