. Last Updated: 07/27/2016

J-7 Maker Airs Its Dirty Laundry

Caveat emptor, but don't let the buyer say he wasn't warned.

Food giant Wimm-Bill-Dann, preparing for a planned initial public offering Friday on the New York Stock Exchange, has opened itself up for scrutiny as required by the exchange's strict disclosure requirements. And the prospectus the company filed makes for strong reading.

Revealed for the first time is Wimm-Bill-Dann's largest shareholder, Gavriil Yushvayev, who holds 26.09 percent of the company and "was convicted of a violent crime in 1980 and served nine years in a labor camp," according to the prospectus, a copy of which was obtained by The Moscow Times.

It also confirms that Wimm-Bill-Dann shareholders and directors are involved with the Trinity group, which has interests in "automobile distribution, financial services, security services, casinos, construction, advertising and engineering" and acknowledges that the group has been linked by the Russian media to organized crime.

Wimm-Bill-Dann, the maker of J-7 fruit juices and Chudo yogurt, refused to comment Monday. But a source close to the company said its honesty should be an encouraging sign for investors.

"By this move the company wants to show that it has nothing to hide," the source said on condition of anonymity. "That's why we have chosen the New York Stock Exchange despite its strict requirements."

Market watchers said Wimm-Bill-Dann's decision throw off its long-held shroud of secrecy supports a growing belief that the truth, the whole truth and nothing but the truth -- no matter how much it hurts -- is the new credo of Russian companies looking to the West for cash.

"A level-three ADR is a very positive moment because it forces companies to disclose an enormous amount of information and to take responsibility for the information," said Dmitry Vasilyev, head of the Institute of Corporate Law and Governance and a former head of the Federal Securities Commission. "Therefore, the companies in Russia with level-three ADRs differ quantitatively in terms of their corporate governance."

According to the Wimm-Bill-Dann prospectus, Yushvayev will have a 20 percent stake after the listing. It also says he is not a member of the board, does not have voting rights for many issues and is not participating in the managing process. Yushvayev, now 37, was 15 at the time of the unspecified crime.

Market analysts said the crime and Wimm-Bill-Dann are hardly connected since the company was formed 12 years later, in 1992. Yet, they said his conviction and other risks such as Trinity's reputation could have a negative effect on the company's image.

The prospectus, while conceding Trinity "has been the subject of speculation in the Russian press, including with respect to possible links to organized crime," is quick to point out that "no charges have been brought by governmental authorities against any of our shareholders or directors and, to the best of our knowledge, none has been threatened." It also states that Wimm-Bill-Dann chairman David Iakobachvili is the head of Trinity Negus, a company that provided security for Wimm-Bill-Dann until 2001.

Iakobachvili, who refused to discuss the IPO at the World Economic Forum in New York, will have 6.65 percent of Wimm-Bill-Dann after the listing.

Wimm-Bill-Dann plans to offer a 29.5 percent stake -- or 10,620,001 shares -- through American Depositary Receipts on Friday at a price of $18.50 to $21.50 each. One ADR is equal to one share. The company hopes to attract up to $230 million of fresh money for highly ambitious $137.2 million expansion and development plans. The company has budgeted an additional $36.2 million beyond the IPO proceeds.

Kim Iskyan, an analyst at Renaissance Capital, said the history dredged up in the prospectus is unlikely to have any immediate impact on Wimm-Bill-Dann. However, he added, "Wimm-Bill-Dann, like any other Russian company, may find that speculation about wrong-doings or corporate governance violations can hit its share price as hard as any concrete proof would."

"There is a lot of enthusiasm among investors toward Russia now, but most still consider the market to be a risky place," said Alexander Branis, head of Prosperity Capital Management, which currently manages six funds and private portfolios in Russia worth $250 million. "So when they see additional evidence of their fear, some of them may take their decision not in favor of Russia."

According to industry sources, this may have made Schroder SalomonSmithBarney and Brunswick UBS Warburg shy away from the deal. They were first approached by Wimm-Bill-Dann last fall to lead the IPO, which is now being managed by ING Baring, with Troika Dialog and Alfa Bank as co-managers. Both Salomon and Brunswick declined to comment on the issue.

A source familiar with the situation said Brunswick UBS Warburg recently got clearance from its compliance department and attempted to come back to the deal. "Unfortunately, the time of Wimm-Bill-Dann's IPO coincided with the bankruptcy of Swissair, and UBS was very reluctant to get involved in something risky," he said.

Only three Russian companies have listed with the NYSE -- Vimpelcom and Rostelecom in 1994 and Mobile TeleSytems in 2000. LUKoil announced plans to place ADRs on the NYSE but later chose the London Stock Exchange with its less tough requirements. Yukos is planning level-one ADRs, which does not involve the same detailed disclosure as Wimm-Bill-Dann's level-three ADRs.

Investors still remember a situation similar to Wimm-Bill-Dann's that surfaced ahead of MTS's ADR float. Russian media reported MTS's parent company, the AFK-Sistema holding, had links to organized crime. Nothing was ever proven. "If you look back on 1996-97, no one really cared about the corporate governance of Russian companies. Investors could not tell one company from another and were buying everything under the massive euphoria towards Russia," Branis said. "But now we don't see anything like that. Investors understand the difference, and this makes Russian companies pay more attention to their image."

One step Wimm-Bill-Dann has already taken is a strengthening of its board. The company has said it will move to add one more independent board member, bringing the number on its nine-member board from four to five. A representative of Templeton Strategic Emerging Markets Fund, which bought a 1.48 percent stake in Wimm-Bill-Dann for close to $10 million in January, may get the post.

It is an important step as Wimm-Bill-Dann's nine individual shareholders are party to an agreement requiring them to vote as a block for at least two years after the offering. The group holds a supermajority stake at present and will hold a simple majority of 70.38 percent to 73.07 percent after the IPO.

"This agreement will give them control over us and the ability to elect a majority of the directors, appoint management and approve certain actions requiring the approval of a majority of our shareholders. The interests of these shareholders could conflict with those of holders of ADRs," reads the prospectus.

ADR holders, however, will most likely secure weak voting rights. The majority of ADRs placed by Russian companies give management or board members, depending on the agreement with the depositary, the right of proxy if holders don't vote through the depositary.

"The proxy issue has been the keystone to conflicts between companies and minority shareholders in the past," said Alexander Ikonnikov, head of the Investors Protection Agency.

A number of companies with depositary receipts have refused the proxy clause, including Yukos, Sibneft and United Heavy Machinery.

The prospectus raises other red flags. The company's 1995 purchase of 15 percent stakes in the Tsaritsyno Dairy and the company's No. 1 Lianozovo Dairy is cited in the prospectus as a potential risk. Privatization legislation in effect at the time required that at least two competing bidders take part in the tender. However, the two bidders were under common control. "In the event that any of our privatized companies are subject to attack as having been improperly privatized, we risk losing our ownership interest in the company or its assets, which could materially affect our production capability, market share and results of operations," according to the prospectus.

The prospectus says Wimm-Bill-Dann had sales of $492 million in the first nine months of 2001 from $465 million in the whole of 2000. Its net income reached $31.6 million for first nine months of 2001 as compared to $21.4 million in the whole of 2000. Total assets of the company, as of Sept. 30, 2001, were estimated at $312.036 million.

The prospectus also says that Wimm-Bill-Dann holds 36 percent of the country's juice market and a 45 percent share of Moscow's market, the biggest juice-consuming region. The company also exports to Israel and parts of Europe. It currently controls 14 enterprises across Russia that produce about 300 dairy products, 150 juices and juice drinks and canned vegetables.