State conglomerate Russian Technologies is selling control stake in the world-largest titanium producer through a management buyout. The deal that totals almost one billion dollars was priced at a 16% premium to VSMPO-Avisma’s average share price over the last three months. Russian Technologies will still hold 25% of the company, retaining a certain control over the company’s strategy.
What looks like an example of a successful privatization case might well be a large-scale fraud.
First, in 2006 private owners sold their shares to Russian Technologies with 30-50% discount to the market price. The deal took place soon after the YUKOS case triggered a nationalization campaign in Russia. Most likely, VSMPO’s owners were forced to sell their shares to Russian Technologies, headed by Sergei Chemezov, one of the most influential figures in the Putin’s team.
Second, the current management buys the controlling stake without any competition from outsiders within a non-transparent procedure. Russian Technologies didn’t bother to organize a competitive auction in order to maximize the selling price. The status of a state corporation grants the conglomerate a right to avoid any privatization procedures prescribed by the Russian laws. Were they invited, Russian and international majors would have been definitely keen to bid for a company controlling 30% of the world titanium market. Within an auction, the premium for control typically mounts to 70-80% over the market price. In the VSMPO’s case the premium to the market price could have been even higher because the company’s current market price reflects the low liquidity of its shares and non-transparent corporate governance procedures.
Third, the management obtains control over the company with the help of the government-controlled Sberbank and Gazprombank, which provide funds for the management buyout.
To put it simple, officials first forced one group of private owners to sell VSMPO for half of its market price and then sold the company to new owners with a great discount to a fair value. Insiders’ benefits from managing and acquiring the company probably count in billion dollars. In the context of this deal the recent corruption scandal in the Ministry of Defense looks just like a media campaign to distract public attention from a real large-scale corruption.
