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Odessa Port Side – A privatisation flop?

July 19, 2016

The deadline of 1800 hours on 18th July for interested bidders to make known their formal interest in the privatisation of Odessa Port Side has now past.

A consolidated list of formal by 1800 hours on 18th July was to precede the privisation event on 26th July, hopefully resulting in the successful, transparent and seamless privatisation of the first major State Owned Enterprise (SOE) under the current Ukrainian leadership.

However the 18th July deadline has now passed – with absolutely no bidders whatsoever formally registering their interest.

It therefore follows that Odessa Port Side will not be privatised on 26th July as the government planned.

Having mentioned the privatisation of Odessa Port Side twice in the past month, two major issues with the privatisation were raised – “Before mentioning a few of those (numerous) terms, there is first the issue of the opening bid price – $527 million.

Is Odessa Port Side worth that?

To be honest, probably not when later considering the contractual obligations any buyer will have”

The other issues related to outstanding litigation against the asset for sale – “The biggest risks for any new owner is perhaps the outstanding and separate litigation by two (in)famous and competing oligarchs.

Mr Firtash makes legal claim over alleged gas debts owed to his РГК Трейдинга company.  A debt figure some state of UAH1.237 billion in relation to 217 million cubic meters of gas is claimed – plus interest.

Igor Kolomoisky claims rightful ownership of Odessa Port Side having once partaken in a previous privatisation of the plant almost 10 years ago which he won.  It was then scuppered by the government of the day, he claims because he won and it was not the desired result.  His legal claim is one of rightful ownership and thus the plant should not be sold.”

The upshot of the asset being over-priced and under litigation from two of Ukraine’s most prickly oligarchs, perhaps unsurprisingly managed to kill all formal interest – despite quite a lot of interest informally both domestic and international (Norway’s Yara Norge, US-based IBE Trade Corp, Koch Fertilizer LLC, CF Industries Holdings Inc, and Poland’s Ciech S.A. among those muted).

The government has now responded to the lack of interest by stating another attempt to privatise this asset will occur in September.

The government claim the lack of interest was due to the high asking price and the debt to Dmitry Firtash – Shock!

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So why was it done so badly?  What is to be done now?

The government have now clarified that the debt (as far as they are concerned) to Dmitry Firtash is actually UAH 3,18 billion – or $520 million.

It is now offering to reduce the opening asking price – by a whopping 30%!

That will reduce the original opening asking price of $527 million to approximately $369 million – plus presumably settling the Firtash debt and notwithstanding a serious 5 year investment clause/obligation into the plant within the sale contract.

Having previously been asked for a personal opinion privately on several occasions regarding the worth of Odessa Port Side, and each time stating “between $350 – $400 million, no more and no less”, a new opening bid price of approximately $369 million seems far more realistic – particularly when considering the investment obligations and employee welfare clauses within the sales contract – and not withstanding the asset related litigation of the oligarchs.

A reader may ponder therefore, now that the government opening price (if indeed reduced by 30%) falls within the valuation this blog stated to those parties that asked, just why it attempted to sell the asset for a minimum $527 million – with such a spectacular failure as a result?  Absolutely no formal interest after such asset promotion and privatisation hype is indeed a spectacular failure isn’t it?  Or is it?

The answer is one of public perception.

The Ukrainian government were and remain mindful of the wrongful perception held by the Ukrainian constituency over the worth of Odessa Port Side (and other SOEs) – which overvalues these assets (or liabilities in most cases) considerably in the collective psyche.

There was a very real concern that the government would be perceived as selling off the family jewels to foreign owners at a fraction of its wrongly perceived worth.  The same perception issues applied for an oligarchy purchase and the inferred grubby dealing that would undoubtedly have followed.

This overvaluation, if confronted by a “selling the family jewels at bargain basement prices” perception would certainly have been stoked by the empty populist political shells such as Yulia Tymoshenko for cheap political points.

Ergo the decision was made within government to set a (very) high opening bid price to mitigate these issues.

The result is such a spectacular failure, bringing absolutely no domestic nor international interest at $527 million, that it may now provide for a shift in the public perception regarding the real worth of Odessa Port Side – and also other SOEs slated for privatisation, whilst also put a pin-prick into the rabble-rousing hot air balloon of the populist politicians too.

The question therefore is whether the July scheduled privatisation of Odessa Port Side was indeed a failure – or whether it was a political success domestically?  The answer will perhaps only be known in September when this asset is subject to another privatisation attempt at a far more realistic price.

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