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By John Helmer, Moscow

Sergei Generalov, the controlling shareholder and president of Far Eastern Shipping Company (Fesco), has apparently decided to sell the company, once the leading dry-cargo shipping company in Russia. The buyer negotiating for the takeover is reported to be the Summa Capital holding of Ziyavudin Magomedov, a rival of Generalov’s in the ports and container segments of the Russian marine market.

Generalov holds about 56% of Fesco through his holding, Industrial Investors. Another 13% of the shares are held as treasury stock through an offshore entity called Neteller Holdings.The European Bank for Reconstruction and Development and East Capital, a Swedish investment fund, have been minority stakeholders with 4% and 7%, respectively. Public shareholders of Fesco, whose primary listing is in Moscow, hold another 20%.

The sale negotiations were reported in Moscow today by Kommersant. Fesco and Summa are not commenting for the time being, but Fesco acknowledges that a deal is “pending”. Confirmation of the deal talks also comes from the filing of an application with the Federal Antimonopoly Service (FAS) to permit the transaction. FAS spokesman, Ekaterina Zubova, would neither confirm nor deny that the application is under review, explaining that the application from Summa may have just arrived at the chancellery of FAS, and has yet to be passed on to the FAS transport department for review.

A 16% premium valuing Fesco at $1 billion, promising Generalov almost $600 million for his stake, has yet to be decided, several industry sources say. One of them told Fairplay he is sceptical that Magomedov will want to pay a premium to take over Fesco. The financial condition of the company has been hit hard since the collapse of shipping rates at the end of 2008. Read that story in full story here.

The latest financial report for Fesco, issued on April 26, reported bottom-line results for the past year. Revenues were up, costs were up, and profits were down. Net profit came to $29.1 million; this compares with a profit of $455.8 million in 2010. The 2010 result had been boosted by one-off sales, including the disposal of vessels and port assets. The most valuable of the latter was Generalov’s sale of his share in the National Container Company (NCC) for $900 million to another commercial rival, Vitaly Yuzhilin; that represented a book profit of almost $500 million.

Fesco’s shipping generates just 10% of its operating profit, while its port terminals add another 22%. If Magomedov takes over the company, and combines it with his quarter-share in the Novorossiysk and Primorsk port companies, he may expect to improve his status as a preferred bidder in the privatization of other port assets around the country, as well as in the government’s privatization plan for Transcontainer, the state-owned rail carrier and dominant transporter of containers in the market. That preference is far from assured; but with Generalov out of the way, Magomedov may believe he will be more preferred than his predecessor.

The timing of Generalov’s exit also reflects the weakening of Russia’s container business, and the intensification of competition between Russian box carriers. The deceleration in growth of Russia’s container volumes, reported as the third quarter gave way to the fourth quarter last year, has now turned into an outright decline in the latest figures released for the first quarter by Transcontainer. A recent report by Denis Vorchik of Uralsib Bank Moscow notes that the import box business is “the most competitive segment of the market”, with the decline “driven mainly by the [impact] of [Transcontainer’s] 6% price hike in December 2011. Import-volume weakness resulted in handling volumes declining at container terminals. As expected, the company continues to lose share of the growing rail container transportation market.”

On May 2 Fesco reported a resume of its operations in the first quarter of this year. A company press release quoted Generalov as saying “we are pleased with the operational results of the first quarter. The figures reflect positive macroeconomic dynamics and our own progress in promoting integrated container solutions as FESCO main strategic priority.” If at the same time Generalov and Magomedov were discussing buy-and sell transaction terms, Generalov’s priority appears to have diverged sharply from Fesco’s, and in a direction he didn’t want to make public.

The Fesco release does not say what is happening to its fleet at sea or to its port terminals on shore. Instead, it said that rail container transportation in the quarter amounted to 60 893 teu, up 15%over the same period of 2011. Volume of non-container rail transportation reached 6.5 million tonnes, up 3% year on year. Sea container volumes in the quarter were 90,344 Teu, more or less unchanged from the year before.

Maritime industry sources say they are not surprised Generalov is exiting because Fesco’s shipping line is struggling, and his plan of expansion into container handling and rail logistics has been opposed by the influential boss of Russian Railways (RZhD), Vladimir Yakunin, and by the federal Ministry of Transport. Their opposition has also made the profitability of Generalov’s railway operations vulnerable to state-sponsored competition.

Generalov has acknowledged he has wanted to buy control of Transcontainer from the state, but was being blocked by Yakunin and the Kremlin. The reported sale talks are a signal that Generalov is willing to throw in the towel if he is paid a high enough price to drop it. Fesco’s market value has collapsed from a peak of $3.5 billion in 2008 to less than a third today – between $700 million and $1 billion since the start of this year.

5-YEAR TRAJECTORY FOR FESCO SHARE PRICE

Generalov has run into Kremlin trouble before. This is the second time that opposition from high-ranking officials has obliged him to sell out. In December 2007 he announced that he was selling out of GeoProMining, a Caribbean-registered venture whose business was based primarily in Georgia at a time when that country was at war with Russia.

Public reporting of Generalov’s business in Georgia also triggered a lawsuit by Generalov in London. One result of the claims he lodged was a statement his lawyers drafted on his behalf, which was read out in the High Court. Referring to his past association with Yukos, Menatep Bank, and Mikhail Khodorkovsky’s patronage, the High Court statement declared that Generalov “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.”

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