Red October Plans Merger and ADRs

MTRed October said it was hoping to raise at least $100 million by offering up to 25 percent as American Depositary Receipts.
Red October, the country's most popular chocolate producer, plans to merge with rival Rot Front and place up to a quarter of the new company's shares in the West to raise $100 million, a shareholder said Tuesday.

Artyom Kuznetsov, president of Gosinkor-Holding, which controls both companies, said the merger would be worked out after shareholders meetings and consultations with the Moscow government, another shareholder in the company.

Kuznetsov said the new holding would work under the Soviet-era Red October name, but would maintain brand names for their products.

"We are uniting purchases, building up a unified marketing strategy and introducing a cross usage of capacities," he told a news conference.

"But how this will be done -- either Red October buys Rot Front or another management decision will be taken -- is still to be discussed in part with the shareholder, the Moscow government."

The Moscow government holds 24 percent of Red October, a pre-Bolshevik Revolution company based on river banks in Moscow, and 23 percent of Rot Front, another leading candy maker. Gosinkor-Holding has 51 percent of Red October and 52 percent of Rot Front.

Red October president Anatoly Daursky said foreign investors hold about 8 percent of the company.

Kuznetsov said the new holding plans to sell shares in the form of American Depositary Receipts to raise at least $100 million.

"The realistic date [of the placement] is in 18 months or two years. An expedient offering would be 20 to 25 percent," he said. "The placement may take place at the London or New York exchange."

He declined to say whether the shares on offer would be from a new issue or from the existing stock.

Russia's biggest juice and dairy products producer, Wimm-Bill-Dann, in February became the country's first food company to place a quarter of its capital in New York through American Depositary Shares. The issue was oversubscribed.

Red October and its eight regional factories account for 8 percent to 9 percent of the nation's confectionery market, while Rot Front holds about 3 percent, company officials said.

Red October produced 74,000 tons of sweets last year, while Rot Front produced 43,000 tons.

"We hope that by unifying the capacities we shall be able to occupy 12 to 15 percent [of the market]," Rot Front general director Valery Pyshnyak said.

Kuznetsov said Gosinkor-Holding planned to invest more than $20 million in the new company.