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By John Helmer in Moscow

Russia’s Economic Development Minister, Elvira Nabiullina (pictured left), has confirmed the government’s intention to privatize the shares of the oil tanker group, Sovcomflot (SCF), which is currently 100% owned by the state.

Nabiullina, speaking at an investment conference in Moscow, said that in order to increase state budget revenues, the privatisation of “ports…airports, Sovcomflot [is] now [being] discussed,” according to news agency reports.

Nabiullina’s ministry spokesman declined to say if the government has decided on a valuation of SCF for the sell-off, on the volume of shares to be sold, or the revenue target to be aimed at. At her public appearance, Nabiullina claimed the proceeds of the selloff might be “several tens of billions of roubles”.

After combining with Novorossiysk Shipping Company (Novoship), SCF is one of the largest oil tanker groups in the world, with a fleet of 143 vessels, weighing in at almost 10 million deadweight tonnes (dwt). Another 24 new vessels are on order, at a cost of $1.4 billion. The company describes itself as “a world leader in the [petroleum] product carrier segment; it is the second largest in the Aframax tanker segment and owns the largest ice-class fleet”. In SCF’s latest financial summary, posted on the company website on September 23, asset value was given as $5.8 billion as of June 30 last. But revenues in the first half of the year have fallen 24%, compared to 2008, to $612 million; earnings (Ebitda) at $306 million was down 26%; and net profit plummeted 65% to $117 million. In a market of falling tanker rates, the sale of a state stake of 20% might be targeted at book value of $1.2 billion. But some maritime industry analysts believe a sale this year would require a substantial discount, and accordingly don’t believe the government will go through the sale until later. There are also market observers who believe an early sale, at a discount price, is exactly what Russian buyers of Sovcomflot shares want.

If the discount is a large one, why sell now? Nabiullina’s office declines to say.

On September 22, First Deputy Prime Minister Igor Shuvalov (pictured right) was reported by Bloomberg as saying “the government may start its new wave of selloffs this year, offering as much as 20 percent of OAO Sovcomflot…The bulk of remaining sales will probably commence in the second half of 2010, with seaports, river ports and airports that need ‘huge amounts of investment’, he said.” A week later, he said at an investment conference in Singapore, that the Russian government plans to invite Singaporean investors to take stakes in selected state-owned companies to boost the country’s privitization plans.”

The urgency of Shuvalov’s timing for a share sale for Sovcomflot within the next three months appeared awkward for the company, because on September 23, it issued a statement by Shuvalov’s successor as board chairman, Sergey Naryshkin, the Kremlin’s chief of staff. This intimated a different timing for a share sale, and also a different purpose for the funds. According to the SCF website, Naryshkin said: “The Board considers it possible for Sovcomflot to tap the capital markets through a public offering of its shares towards the end of 2010 or the beginning of 2011 with the proceeds of such an issue to be used to fund the Group’s investment programme, and in particular its entry into offshore services. The final decision on this matter will be taken by the shareholder in line with the recovery of the freight and stock markets.”

SCF’s London spokesman Bill Spears has suggested that Naryshkin’s statement marked an “update” on Shuvalov’s.
SCF’s Moscow spokesman Andrei Kechashin was asked to amplify on the financial disclosures to date, and add information on costs of sales and operations, as well the value of impairments or writedowns of asset value that SCF, along with other shipping companies, have been obliged to report. He promised an expert response on the specifics, but this has not materialized after a week. SCF’s website posting acknowledges that “certain provisions for value impairment [have been] made as required under International Financial Reporting Standards (IFRS).” The company spokesman was explicit on one point: “Is Mr Helmer still accredited at the Ministry of Foreign Affairs?”, he has written.

Industry sources believe that Shuvalov and Naryshkin are speaking of two quite different Sovcomflot share sales. The first, now endorsed by Nabiullina, whose ministry also runs the state property agency, is intended to put a significant stake of SCF in the hands of strategic Russian investors, who are yet to materialize. If the share price is low for them, the loss to the state budget will be their gain. Especially, if, as Naryshkin appears to propose, an offshore initial public offering (IPO) will be at least a year later, in 2010 or 2011, when publicly listed tanker fleet valuations are expected to recover. Thus, it appears to be the government’s thinking that the privatisation proceeds will go into the budget, while the IPO proceeds will be spent on investment projects.

Moscow analysts say that unless SCF can lift its earnings (Ebitda) significantly, its valuation in the international market may be no more than a multiple of six times Ebitda, or between $3 billion and $4 billion. At that level, the selloff contemplated by Shuvalov and Nabiullina is unlikely to fetch more than $800 million. Uralsib Bank maritime analyst Anna Kupriyanova believes this year’s Ebitda will be too low to warrant a share sale, and expects that to happen next year, when better earnings and a higher multiple should make SCF worth between $5 billion and $6 billion. Moscow maritime analyst Alexei Bezborodov says that the Ebitda multiple might be as high as 8, making a target valuation for a share sale this year of $4.9 billion — still below SCF’s current figure. Bezborodov also cautions that “if the shares are offered to a strategic investor, then big discounts will be required.”

Weighing on SCF’s valuation for both sales is the UK High Court proceeding, which commences in London on October 1. Calling this the “Trial of the Decade”, the Oslo maritime news medium TradeWinds, in a report by Julian Bray, a well-known London maritime specialist, reports that Sergey Frank, SCF’s chief executive, will testify in court, in support of SCF’s claim for $800 million in compensation for losses alleged against Frank’s predecessor, Dmitry Skarga, and SCF’s former chartering partner, Yury Nikitin. Skarga and Nikitin claim the expert evidence, including reports from international accountants Moore Stephens, commissioned by Frank himself, exonerate them. Witness statements already submitted identify Gennady Timchenko, the well-known Russian oil trader, the Gunvor oil trading group, and the associated Clearlake shipping companies, as involved in the issues to be decided by High Court Justice Andrew Smith.

The TradeWinds report indicates that “with nearly 100,000 pages of documentation and around 30 witnesses, the high-stakes case is timetabled to take six months to complete.” The report suggests that the trial will probe more deeply into SCF’s financial reports than SCF presently allows, and will lead to an unprecedent ruling by a UK judge on the probity of the two SCF managements, Skarga’s and Frank’s, and their business allies, Nikitin and Timchenko. According to TradeWinds, Frank is “obliged to take [the court] action as part of its commitment to good corporate governance and transparent business practices. SCF sees this as particularly significant in the context of plans to float part of the company”.

Frank is scheduled to testify in court on October 5, and then to be cross-examined by lawyers for Skarga and Nikitin. When asked if Frank will do so, his spokesman Kechashin has so far not responded.

Kechashin was also asked to say why SCF does not release publicly an audited set of financial data. He has not replied.

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