Firms Trying to Gain Foreign Footing

EventicaAlexei Venediktov addressing the Russia Investment Roadshow on Tuesday.
LONDON -- Dmitry Afanasyev, a high-powered Moscow lawyer, needles Aeroflot CEO Valery Okulov at least once a year about the fact that the airline doesn't offer a direct flight to Miami.

Every time, Okulov replies that there are not enough people who want to fly to Miami to justify the route, Afanasyev said. But the last time Afanasyev raised the issue, Okulov said Aeroflot didn't have enough jets.

That's part of the reason the state-owned airline is eyeing a takeover Italy's troubled Alitalia, said Afanasyev, a mergers and acquisitions lawyer with Yegorov, Puginsky, Afanasyev and Partners (Story, Page 4.)

Alitalia has 200 planes, while Aeroflot has 90.

Flush with cash, Aeroflot and other Russian companies are eager to expand abroad. They already own foreign assets worth $59 billion on six continents, according to some estimates. President Vladimir Putin has been equally eager to assist Russian businessmen with deals, most recently pushing Italian Prime Minister Silvio Berlusconi over Aeroflot's bid on Friday.

Russian investors, however, should think twice about seeking the Kremlin's support in their expansion plans, and they should avoid it if at all possible, Afanasyev and nine other lawyers, many with experience involving Russian companies, told the Russia Investment Roadshow in London on Tuesday.

"Political support can be the wrong and the worst thing to do. If it's a key sector, you had better have a purely private appearance," said Oleg de Lousanoff, a lawyer with Germany's Hengeler Mueller.

Putin spent most of his foreign trips during his second term aggressively promoting Russian economic interests abroad, and a delegation of business leaders followed him in tow.

Top 10 Acquisitions Abroad In 2006-2007
No.YearTargetPlaceBuyerValue $ bln
12006SUAL and Glencore's aluminum assetsGlobalRusAL30
22007LionOreCanadaNorilsk Nickel5.3
32006Oregon Steel MillsU.S.A.Evraz Group2.3
42007SulzerSwitzerlandRenova Group1.7
52007StrabagAustriaBasic Element1.62
62007Magna InternationalCanadaBasic Element1.5
82007Energetic SourceItalyRenova Group1.2
102007HighveldSouth AfricaEvraz Group0.7
Source: M&A-Intelligence Group of Mergers & Acquisitions magazine, RussiaSource: M&A-Intelligence Group of Mergers & Acquisitions magazine, Russia

Putin told top businessmen during a Kremlin meeting in February to expand abroad, and President-elect Dmitry Medvedev had a similar message when he met with businesspeople in Krasnodar in January.

"Business should be confident that it will always have the state's backing on world markets -- this is the state's duty," Medvedev said. "This is particularly true of sectors subject to global competition such as the energy sector and high-technology machine-building."

The lawyers warned, however, that investors would be well advised to avoid the Kremlin's assistance unless the deal involved two state-owned companies like Aeroflot and Alitalia. (Even then, Aeroflot said Tuesday that while it treated instructions from Putin concerning Alitalia "with understanding," it would only be looking for a deal that made economic sense.)

The problem, the lawyers said, is that Russia still suffers from a poor image, and that Western politicians and the public tend to get jittery when they believe the state is involved in a business deal.

"The lack of image is one of the main challenges a Russian investor has to face," said Patrick Dziewolski, a lawyer with France's Bredin Prat, which represented the French government in the VTB/EADS affair and Arcelor in its dealings with Alexei Mordashov's Severstal.

A public outcry followed an announcement by state-owned VTB in 2006 that it had acquired a 5 percent stake in EADS, the maker of Airbus planes. VTB later sold the stake to state-owned Development Bank. Also in 2006, Luxembourg-based Arcelor voted down a deal with Severstal, merging with Mittal Steel instead.

Failed Deals Abroad
BuyerTargetCountryValue, $bln
LUKoilMazeikiu NaftaLithuania1.5
UESVarna thermal power plantBulgaria0.64
MMKPakistan SteelPakistan0.36
GazpromGeorgian gas pipelineGeorgia0.23
Source: M&A-Intelligence Group of Mergers & Acquisitions magazine, Russia

Severstal took the wrong approach, and that is why its overture was "very badly received," Dziewolski said.

Russian companies commonly make the mistake of trying to handle business abroad the way they are accustomed to doing things at home, including largely ignoring the interests of minority shareholders, participants said at the forum. Mordashov worked solely with Arcelor's board of directors and relied too much on the Kremlin's support, said Alexei Venediktov, editor of Ekho Moskvy radio station, who said he counted Mordashov among his friends.

Lakshmi Mittal, who won the Arcelor bid, went to minority shareholders instead, he said at a separate session.

"It was a silly situation," Dziewolski said. "They just put the Russian investor and the Indian investor face to face."

He said image proved paramount to the deal, and the companies' business strategies were largely ignored.

Breakdown of Russian Assets
Western Europe52%
CIS 22%
Central and Eastern Europe 11%
North America 6%
Africa 4%
Asia and Australia3%
Latin America 2%
Total assets value:$59 billion
Total number of subsidiaries and branches:630
Source: NTV
At the same time, some Russian companies display a level of sophistication and expertise abroad, the lawyers said. Andy Nussbaum of New York- based Wachtell Lipton praised Norilsk Nickel as a "very sophisticated" M&A player, "not something you'd have predicted."

Other companies still have a lot to learn. A Russian investor signed an agreement to buy a U.S. chemical firm for $10 billion to $15 billion, and when a U.S. company offered more, the Russians received a multimillion-dollar check to terminate the contract, Nassbaum said.

"They didn't know what the check was for. They didn't know that they could be overbid," said Nassbaum, whose law firm represented the winning company.

That Russian businessmen count on political support is understandable, Venediktov said. "But it happens too often," he said, adding that the government's "overly aggressive attitude" hasn't helped matters.

Still, some investors said the Kremlin could do no harm. Yevgeny Retyunsky, board member of Unicredit Bank, said there was no such thing as too much support. "Presidents of all countries are doing this," he said.

"One hopes that when the Russian president travels he will stick up for Russian companies as a whole," said Francis Richards, chairman of Altimo's international advisory board. He added, however, that Altimo, a subsidiary of Alfa Group with $9.7 billion in foreign assets, relied on its own resources.

Afanasyev, the lawyer, said a Russian company should only seek state help if it could explain to the targeted foreign company why the help was needed and how the proposed acquisition was in the national interest of the foreign country.

Nussbaum struck a similar note: "There is no question that, if handled properly and handled with some finesse ... a Russian sovereign wealth fund would certainly be welcomed in the U.S." He said, however, that the fund would have to start with U.S. businessmen, not the U.S. government.

Top 5 Russian Investors Abroad
 Assets Abroad, $blnTotal Assets, $bln
Source: NTV

Some participants expressed hope that Russian companies would find it easier to expand abroad under Medvedev, who will be inaugurated May 7 and is seen to be more polished than the sometimes crude-talking Putin.

"Medvedev has a different image," said Vyacheslav Nikonov, the Kremlin-connected head of the Politika research center, during a session Monday.

"After all, he's not a street kid," he said, referring to Putin.