VEB Takes Over Hungary's Malev

Vneshekonombank will take over Hungary's flag carrier Malev within days, officials said over the weekend, marking the state-owned bank's second major foreign acquisition this month and providing a boost to Aeroflot, which might run the airline.

The takeover was necessary because Malev's main shareholder, Boris Abramovich, former owner of the bankrupt AirUnion airline, failed to fulfill the obligations he took in acquiring his 49 percent stake in the airline in February 2007, Hungarian Finance Minister Janos Veres said Saturday.

"The steps taken since the privatization have not been adequate to ensure the future of the airline," Veres said at a news conference in Budapest.

Vneshekonombank, or VEB, financed the privatization and is still one of Malev's major lenders. The airline has taken out a 30 million euro ($39 million) loan from the bank to finance expenses and improve its liquidity.

"The previous owner's weak management and the global financial crisis have prompted us to seek a solution and finally put it in order," First Deputy Prime Minister Viktor Zubkov said at the same news conference.

The owner of the company will be changed in the next two to three days, Zubkov said.

He said Aeroflot, Russia's flag carrier that has tried unsuccessfully to acquire a European airline, would be Malev's "strategic partner."

Asked what the partnership would entail, Aeroflot spokeswoman Irina Dannenberg said her airline "could take part in managing" Malev. She declined to elaborate.

It was not clear the size of the stake VEB would take in the airline and how much money, if any, it would spend on the deal. A VEB spokeswoman told The Moscow Times last month that any potential deal with Malev would involve a minority stake of less than 49 percent.

Malev spokeswoman Krisztina -Nemeth said investors would hold a special shareholders meeting Tuesday. "Settlement of the capital position of Malev, including the opportunities for a reduction in capital and possible changes in the board, are on the agenda," Nemeth said by telephone from Budapest.

VEB, the state development bank, will also take part in the meeting, Veres said.

VEB spokespeople and Abramovich were unavailable for comment Sunday. Malev chief executive Peter Leonov did not answer the e-mailed questions.

The acquisition casts the spotlight on VEB, flush with billions of dollars in government funds meant to rescue crisis-hit Russian industry. Earlier this month, VEB acquired struggling Prominvestbank, Ukraine's six-largest lender, for 1.3 billion hryvnias ($150 million) and is expected to inject another 7 billion hryvnias in the bank.

"VEB is a state corporation, and it is pursuing the government's interests in Russia or abroad despite the crisis or anything else," said Natalya Orlova, chief economist at Alfa Bank.

A 2007 law defining VEB's mission says it should act to secure the competitiveness and diversification of the Russian economy and stimulate investment activity through the realization of projects in many sectors at home and abroad.

The Malev deal could give Aeroflot a toehold in Europe, where it dropped a bid for ailing Italian carrier Alitalia in 2007, citing a lack of information about the potential acquisition. The deal also could give synergies to Aeroflot if it wins a stake in Czech Airlines, which is now being privatized.

Malev laid off 21 percent of its workforce last year and halted long-haul flights to Toronto, New York and Bangkok.

When Malev was privatized in 2007, a 99.95 percent stake in the company was acquired by AirBridge Zrt, which is 49 percent owned by Abramovich and 51 percent owned by Hungarian investors Kalman Kiss and Magdolna Kolto, according to Malev's web site. Kommersant reported last month that Abramovich holds additional shares through affiliated companies, giving him control of the airline.

Abramovich used his Malev shares as collateral in taking out a 102 million euro loan from VEB to buy them, the Kommersant report said, citing unidentified sources. Abramovich stopped fulfilling his investment obligations to Malev soon after AirUnion, a Russian airline, collapsed in September, the report said.

Kommersant speculated that Abramovich would sell his shares to Aeroflot or that VEB would take over the shares and transfer them to Aeroflot.