Sibir Dives on Investor Bailout

MT
An announcement by Sibir Energy on Wednesday that it was taking on an additional $340 million worth of distressed assets owned by major shareholder Shalva Chigirinsky sent the company's shares plummeting, losing more than half of their value on the London Stock Exchange.

The company said the decision to pick up the assets from Chigirinsky and his partner, Igor Kesayev, would be put to shareholders at a general meeting on Dec. 18. The company had earlier denied rumors that Chigirinsky and Kesayev's were facing margin calls for his 47 percent stake in the company, which already agreed to buy $158.9 million in assets from the two, including Moscow's Sovietsky Hotel, in October.

London traders offered an immediate negative reaction to the news, sending the stock down by 57 percent by the end of trading.

Sibir Energy CEO Henry Cameron said in an interview Wednesday evening that the London shares' performance did not reflect the true value of the company.

"The market shows its view about investing in Russia by being volatile, but that's the market, not the fundamentals of the company," Cameron said.

Financial analysts worry, however, about the effect the decision will have on minority shareholders and the future of corporate governance in Russia.

This is the second time in a month that a Russian tycoon has transferred unfavorable assets from one company to another. Billionaire Vladimir Potanin performed a maneuver similar to Chigirinsky's in mid-November, when he sold assets of his Interros holding company to the power generator OGK-3, a subsidiary of Norilsk Nickel, in which he owns a stake.

"It seems to be never ending in how bad it can get," said Clemens Grafe, chief strategist at UBS. "It's not the first instance when we've seen minority shareholders getting pummeled by the majority shareholder, but it's the most blatant one."

Comparing the current situation to 1998, when Russian businessmen transferred assets around in order to keep them out of the hands of Western banks, Grafe said it was alarming that the government was turning a blind eye to the practice today.

"What you really wonder is why the government is allowing this to happen," Grafe said. "You question to what extent they are in control."

"Sibir Energy is not the biggest company in the country, and if you don't see the government reacting to them, you don't know what's going to happen when something like this happens to a bigger company," he added.

"Unfortunately, this is another sign of corporate governance not particularly improving," said Alexander Burgansky, head of equity research at Renaissance Capital.

While Sibir CEO Cameron admitted that the decision to acquire the asset was an "uncomfortable" one, he said it was necessary to preserve the company's existing shareholder structure, with Russians in the majority position and foreigners holding minority stakes.

"We understand that we will be criticized for our lack of corporate governance, but we prefer to think that what we've demonstrated is decisive management," he said. "At a time like now, we think that is more important than corporate governance."

He added that Chigirinsky and Essayer's 47 percent stake in the company was essential to Sibir Energy's commercial success in Russia.

"This is a fund vehicle controlled by Russians in which foreign investors have a stake," Cameron said. "That is the formula, that is the structure."

Chigirinsky released a statement on the Sibir Energy web site Wednesday expressing his gratitude for the support from company management.

"I am very grateful for the support shown to me by the board and, I hope, the loyal Sibir shareholders, who can be assured that our team will continue to work tirelessly to deliver outstanding returns across the business," he said.

While it is natural that a major shareholder like Chigirinsky would attempt to move around assets like this, it could bring consequences later, said Sunshine Hawk, head of equities at Metropol.

"That a Russian oligarch in desperate times would do something like this is not surprising," Hawk said. "Everyone is desperate for cash right now, and I think people want to save their butts now and pay the price later."

While the company said it believed the transactions to be "fair and reasonable insofar as shareholders are concerned," it will likely be forced to deal with the wrath of its minority shareholders, financial experts said.

Burgansky of Renaissance Capital said the additional real estate projects, many of which are in the early stages of construction, would cut into the capital needed for Sibir Energy to continue its expansion in the oil and gas sector.

"A lot of them are in early development stages and require additional funding in the future," Burgansky said. "Now the company's ability to fund its [traditional] functions is significantly diminished."

Among the real estate assets Sibir Energy is set to acquire is Russia Tower, a 600 meter-building designed to be the tallest in Europe. A lack of funding prompted a halt to the structure's construction last month.

While Cameron admitted that many minority shareholders might be irked by the transactions, he said new minority shareholders would treat it as an opportunity.

"There will be many minority shareholders who will take advantage of the fact that other minority shareholders are displeased at what we've done," he said.

He added an additional justification in the company news release.

"Doing business in Russia has never been for the faint-hearted," Cameron said.

The print version of this article incorrectly states that Igor Kesayev was facing a margin call for his stake in Sibir Energy.