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Odessa Port Side privatisation – Group DF (predictably) raises its bidding head

September 16, 2016

During the 13th YES conference in Kyiv, President Poroshenko repeated once again the intention of Ukraine to privatise many State Owned Enterprises (SOEs) (most of which are a drain upon the State through subsidies and corruption).

The first on the list is Odessa Port Side (OPS), which Ukraine has already once tried and failed to privatise a few months ago due to lack of interest.  As stated many times by the blog, considering the outstanding debt to oligarch in exile Dmitry Firtash of $251 million, the best possible sale price would be between $350 – $400 million and nothing like the ridiculous starting bid price of $527 million the Ukrainian State initially put forward.

OPS will undergo a second attempt at privatisation very soon – this time the Ukrainian State opening bid price is a dramatically $150 million, a figure that is likely to see something like competitive interest occur – and possibly reach the $350 million(ish) the blog notionally qualified OPS asset worth at so very long ago.

The claims of Ihor Kolomoisky regarding OPS ownership via a previously quashed privatisation have been dismissed by the courts, leaving the major issues as the debt to Mr Firtash and the clauses within any purchase regarding asset investment, workforce etc for any potential bidders.

OPS has long been a State asset that both Ihor Kolomoisky and Dmitry Firtash covet, neither having been shy about their desire to own it historically.

Of the foreign interest muted, Norway’s Yara Norge, US-based IBE Trade Corp, Koch Fertilizer LLC, CF Industries Holdings Inc, and Poland’s Ciech S.A etc, missing any mention has been Dmitry Firtash’s Group DF, or Ostchem, (significant among the and other subsidiaries under the Group DF umbrella).  Perhaps with Mr Firtash being an (in)famous Ukrainian oligarch he is/was seen as a potential domestic bidder regardless of the long-standing foreign homes of his corporate machinery.

Indeed little is mentioned of Mr Firtash since he became marooned in Austria following a US attempt to extradite him following an indictment against him being opened in 2014.  Having checked with people within the State Department only a few weeks ago, US policy toward Mr Firtash remains unchanged, thus Vienna looks likely to remain home for some time.

Boris Krasnyansky

Boris Krasnyansky

Nevertheless, it has become clear via Boris Krasnyansky of Group DF during the YES conference, that there remains a real interest in purchasing OPS.  “For our business in the production of mineral fertilizers it is a logical asset for the completion of the corporate structure and is therefore definitely interesting.”

No surprise.

Perhaps even less of a surprise when Group DF can write off the $251 million it is owed should it become the owner of OPS which owes it.  Internal write-offs happen all the time, particularly within somewhat opaque accounting structures.

Few would doubt Mr Firtash can afford it too?  He is a $ billionaire oligarch after all.

Well maybe he can, and maybe he can’t.  There is a significant difference between asset worth and cash flow/cash on hand.  There is also a question over what Mr Firtash owes others too.

In making his $155 million/€125 million bail in Austria, that available cash came via Vasily Anisimov (Chairman of the Russian Judo Association) – “I have known Mr. Firtash for a number of years, though he is neither my friend nor business partner.  I confirm that I loaned 125 million euros to him. This was a purely business transaction.

Undoubtedly a reader is now considering President Putin’s affection for Judo, and how and why the Chairman of the Russian Judo Association would lend “neither a friend nor business partner” so much cash, and the contractual details of this “purely business transaction“.

Whatever the case, Mr Firtash was clearly unable to raise that cash sum himself back in 2014.

Perhaps cash on hand issues have improved since then, but if not, where will anywhere between $150 and $400 million come from to buy OPS, and can the gas debt simply be written off within the Group DF structure if it owes money elsewhere?

Who would it owe money to?

Where has Group DF and Ostchem found its money before?

Historically it has come from Gazprombank whilst directly/indirectly under the control of Yuri Kovalchuk (currently under western sanctions) and euphemistically known as “Putin’s personal banker”.  Gazprombank has a reputation of being the “collective Putin” pocket bank.  That bank has had at peak, somewhere between $7 – $12 billion in lines of credit open to Mr Firtash’s business empire.  In 2011, for example, Mr Firtash owed Gazprombank $2.08 billion but it went on to lend another $2.2 billion (about 25% of the bank’s total capital.)

Perhaps those debts have been repaid – perhaps not.  It is rumoured that Mr Firtash’s gas intermediary business made between $1 and $2 billion per annum, but assuredly that money was not all his.  In such deals, there are outstretch hands – and everybody’s got to eat.

The question therefore is where and who the money comes from for any Group DF (or Ostchem) bid regarding OPS if the apparent cash flow issues surrounding 2014 bail payments have not been overcome?

As those recognised by the Ukrainian State as “aggressors” will not be allowed to compete and win in any (strategic) asset privatisation (read Russia), how will Group DF be viewed legally, politically and economically as a corporation if still in hock to Gazprombank for $ billions – even if a different lender provides credit for any OPS purchase?

If Group DF is now with more than enough cash on hand without lines of credit or loan borrowing, how would the Ukrainian constituency react to selling OPS to a man widely known to have close Kremlin associations, pro-Kremlin views, and perceived to have been involved in numerous nefarious schemes?  Currently he personally is out of sight and therefore, for the most part, out of mind – even if his business partners and rented politicians are less fortunate when it comes to continued public scrutiny.

Fortunately for Ukraine, even if holding the most transparent OPS privatisation, being the highest bidder does not mean automatically becoming the owner – there is thus significant wiggle room to avoid that outcome if necessary.  Further, it is not as though OPS has to be privatised at any cost, whether that cost be counted in $ or political points (albeit understandable to get it off the government books when it requires so much modernisation and subject to management that is perhaps not the best available).

The end of September will see the second attempt to privatise OPS begin when interested parties will have to declare their interest.  By the middle of November, OPS may well have a new owner.  It probably won’t be Mr Firtash – but never say never.

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