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By John Helmer, Moscow

Russia, it turns out, has the only government in the world able and willing to do real damage to Rupert Murdoch – and throw him out.

While the UK and US governments hold their breaths as squads of policemen poke through the Murdoch media files to find evidence of corrupt entertainments and backdoor understandings with powerful politicians – some of them still hanging on to power — the Russian state bank VTB has put together a consortium and obliged Murdoch to accept $270 million for his 79% control stake in the outdoor advertising company, News Outdoor Russia.

Murdoch and his News Corporation subsidiaries had been asking $1.65 billion for the stake in 2008, when Murdoch himself decided that owning street signs and four radio stations weren’t getting him either the influence or the payback he expects in a field of operation, or a country.

The radio stations – three in Moscow, one in St. Petersburg — were sold off in April of 2010, though no reference to Murdoch’s sale of the assets can be found in News Corporation’s reports. That he owned them through two Russian entities called Radio Modern LLC and Radio Nostalgia LLC appears in a News Corporation financial report of 2001. Russian reporting suggests Murdoch got no more than $15 million for his sale.
 

On the News Corporation website, News Outdoor Russia (NOR) is called “the clear market-leading and largest OOH advertising company in Russia with over 36,000 advertising faces in more than 90 cities. A wide range of formats is offered including billboards, street furniture, supersites, spectaculars, banners, airport and point-of-sale advertising.” In adman lingo — OOH stands for Out of Home, and “street furniture” stands for ads like the one in the image to right.

But NOR has been a difficult asset to sell because Murdoch put such a high price on it, and unlike the prostrate Australians Murdoch puts in charge of most of his operations, Maxim Tkachev, the controlling manager of NOR, was in covert, then overt rebellion against his shareholder. Tkachev appears to have had discreet support from that great Russian backstop, the Office of the General Prosecutor.

In June of 2007, News Corp announced it was looking for an exit by claiming it was opening the door to new partners. “News Corporation today announced that it intends to explore strategic options for News Outdoor Group in connection with News Outdoor’s continued development plans. These strategic options include, but are not limited to, exploring the opportunity to expand the existing shareholder group through new strategic and private equity partners.” Goldman Sachs was awarded the mandate to value the asset and find someone to buy it.

Goldman Sachs was presumably aware of the valuation News Corp placed on NOR. Two years earlier, there had been a transaction on September 8, 2005, when the group said it had exercised an option to buy a 25% stake in NOR’s controlling entity offshore from a joint-venture partner called Capital International. But neither the News Corp annual report for the period, nor reports to the US Securities & Exchange Commission (SEC) reveal the price paid, and thus the valuation at the time for the Russia-based operations. An uncorroborated Moscow report places the deal price at $125 million, making NOR’s worth $600 million in late 2005. By 2007-2008, Murdoch had apparently told the accountants at News Corp to triple the asset value.

Over the past four years, an attentive reader of News Corp’s annual reports and financial statements could find minuscule references to NOR, but no report of its book value, value impairment or write-down, profit or loss contribution to the group, or anything else of financial significance.

Holding companies called OOO Ultra Production, Logovaz News Corporation, APR City, AR Technologies, DDUP, Outdoor Systems, Outdoor Technologies, Rawkus Entertainment [sic], Service Reklama, and TVD are identified in the News Corp reporting as controlled entities in Russia; but there is no reference to what role they have played in divvying up the group’s shareholding control of the assets, and probably the cashflows, costs, and profits remitted offshore, past the Russian tax man. The division of equity registered in Russia is so complex, and the superstructure of holding companies which collected their cashflows offshore so well hidden, Murdoch appears to have taken a tutorial in methodology from a Russian oligarch.

It was the type of concealment scheme Murdoch’s reporters and the editor of the Sunday Times intimated was illegal when in 2009 they attacked Elena Baturina, wife of former Mayor of Moscow Yury Luzhkov, for buying a London residence through use “of nominees as the shareholders and officers of [Safran Holdings] to hide her interest as the beneficial owner.” Baturina is now suing Murdoch’s newspapers for the libellous innuendo in the UK High Court.

It appears from the very fine print that Murdoch wasn’t really investing his own cash in Russia. Instead, he was borrowing from the European Bank for Reconstruction and Development (EBRD). As a major capital contributor and shareholder of EBRD, the Russian government might thus be said to have been indirectly financing Murdoch to do his Russian business. The first EBRD loan in 2004 came to $93 million, and was fully drawn. The second loan of $130 million granted in 2005 was partially drawn, and as of June 30, 2005, a total debt to EBRD of $137 million, plus interest, was recorded. According to the News Corp documents, “the cash flows from these facilities have been and are to be used to expand the Company’s businesses in Russia and Eastern Europe.” According to EBRD today, the loans were repaid some time ago.

After mid-2007 there is no reference to Russia at all in News Corp news releases or financial reports. But there was plenty to read about in Russian. The US SEC may now question whether News Corp was intentionally and unlawfully withholding material information and price-sensitive news on the plummeting value of the assets in Russia from the group’s shareholders.

According to the local press reports, NOR had come under investigation by the State Duma, the audit commission of the Moscow city government, and finally the Investigative Committee of the General Prosecutor. Among the charges – obtaining billboard space without the required tendering competition, paying bribes and kickbacks to city officials, monopolizing the outdoor advertising business by pressuring competitors, underpaying rent for outdoor space, etc. One outcome – an amendment to the law on advertising prohibiting a company with 35% of the outdoor advertising space from acquiring more. A second outcome – a civil court case filed by the Advertising Committee of the city government. A third outcome – the opening of a criminal case, a police raid on NOR premises, and attempts to hush up the proceedings, stop them, and reopen them again. Federal tax claims against NOR for 2005 and 2006, amounting to about $50 million, also started wending their way through the Russian courts.

For Murdoch, this was the writing on the wall. But it was not the type of outdoor advertising in which he believed. Instead, he announced publicly the problem was political, and the fault in the Kremlin. “The more I read about investments in Russia, the less I like the feel of it. The more successful we’d have been, the more vulnerable we’d be to having it stolen from us. Better we sell now.” It was the classic thief’s retort — “We Wuz Robbed” – and Murdoch’s media have followed in chorus.
 

Tkachev (right) revealed in a detailed interview, published in December of 2008, that Murdoch and News Corp had come very close to selling their stake in NOR to the French international advertising group JC Descaux. “You know that JCDecaux and we have invested in this transaction much time and effort, and I as a human being am sorry that it did not happen.”

“But life goes on and News Outdoor has all the chances after the crisis to emerge stronger.” Tkachev admitted that Murdoch’s reported asking price of $1.65 billion was “close – greater I cannot say.” He also conceded that JC Descaux’s offer price was $1.3 billion. About Murdoch’s attack on the Russian “investment climate”, Tkachev said: “This is just one of those issues on which my opinion is in disagreement with our esteemed shareholder, although his statement is symptomatic enough. It is a well-known fact that the Russian business climate does not get the fairest coverage in foreign media, and this factor has played the decisive role in [Murdoch’s] remark. The paradox is that this thesis was voiced by the man, who has himself greatly influenced the formation of world opinion.”

Since 2009, however, Tkachev has gone silent, and the exit or ouster price of the “esteemed shareholder” has kept falling. As late as last week, NOR was refusing comment on the terms of the sale. But sources close to the sides claim that in 2008 and 2009 Murdoch understood that the police and prosecution tactics were related to the pricing of the share sale, not with the intention of blocking it, or of reducing the transaction price.

The Russian hunch, according to a source who was investigating closely, was that Murdoch was the target of the attack on NOR, because he had tried to sell his stake at a premium, and refused to share the profits, even though he and his News Corp executives knew full well the illegal nature of part of their revenue and profit generation. When Murdoch then attacked the “investment climate” in Russia, he was understood to be making himself appear to be the innocent victim of a process he had manipulated to his (considerable) profit.

Having alienated everyone on all sides of the attempted transaction, the state regulators, and NOR itself, including Tkachev, Murdoch and News Corp had no independent capability to counter-attack, nor could they relieve NOR of the pressure.

Thus, the personal qualities now on public display on UK television made Murdoch an easy mark in Moscow, so long as there were no friends in either the President’s or the Prime Minister’s entourage to coach or rescue him. One small step for Russia, one giant leap for mankind.

The announcement in today’s Vedomosti – owned partially and indirectly by Murdoch through the Wall Street Journal – is that VTB Capital, with a syndicate comprising entities in the Alfa Bank group and other individuals, have finalized a sale and purchase transaction for NOR at a price of $270 million. NOR declines to confirm the report, or the published quote from Tkachev to the effect that “the deal is ready”.

A more informative report on the deal appears by Sergei Sobolev, the veteran media sector reporter of Kommersant. He reports that NOR’s annual revenues are running at no more than $350 million. Debts include $78 million owed to Raiffeisen Bank. According to Sobolev, the state through VTB will now hold 50% in NOR. Tkachev and other managers will keep a stake of about 21%.

The public records of FAS supervision of NOR and the outdoor advertising market in general, are ambiguous and unclear on the crucial point – how much of the market NOR actually controls. In July of last year, for example, FAS ruled that NOR entities, APR City and TVD, held 58% of the Irkutsk city market, and more than 80% of two districts in Ivanovo, a small town north of Moscow. Nothing has been released by FAS on NOR’s position in the Moscow city market apart from references to non-official reports which estimate NOR’s share between 10% and 50%.

FAS has not yet responded to a request for clarification of an investigation it has reportedly conducted into the beneficial owners of offshore companies identified in the NOR sale deal, apparently on the buying side. Prime Minister Vladimir Putin is said to have requested FAS research the beneficiaries of the Murdoch sale, and also NOR’s current share of the outdoor advertising market in Russia. That was almost certainly the coup de grace for the still stubborn Murdoch. FAS is reported in the Moscow press as confirming that this month it has approved Murdoch’s departure at $270 million.
 

Presumably, that’s a gross figure for the sale. If News Corp nets less, there will be no report to the SEC or to News Corp shareholders to reveal by how much or where the money went; or, sotto voce, how compliant News Corp executives in the US have been with the US Foreign Corrupt Practices Act since Murdoch took control of NOR.

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