Asset privatized: Svyazinvest
Percent sold: 25% of shares plus one
Amount paid: $1.9 billion
Date: July 25
Successful bidders: Uneximbank, Soros Quantum Fund, Deutsche Morgan Grenfell, Morgan Stanley Asset Management
In the last minutes before five o'clock one Friday this past summer, the biggest privatization deal in Russia came down to two envelopes. The atmosphere that day was electric.
At 20 minutes to five Moscow time, Leonid Rozhetskin arrived at Russia's privatization committee offices with an envelope in his hand. The head of investment banking for Renaissance Capital in Moscow was carrying a top-secret billion-dollar bid for 25% of Svyazinvest, the country's telecommunications network and the most eagerly awaited privatization deal to date.
Svyazinvest's privatization had been dogged by controversy since 1995 when Italian operator Stet scrapped a strategic purchase at the eleventh hour after financing squabbles. And, following Russia's well-publicized loans-for-shares scandals, cynicism was high that this latest round of privatization would be no less corrupt.
But now, in 1997, the Russian government was strapped for cash and determined to raise more funds with an open, competitive auction for the state's reorganized sale of 25% of Svyazinvest. A mega-holding company for stakes in more than 85 regional telephone operators, Svyazinvest also includes a 38% chunk
of long-distance provider Rostelekom and shares in the ageing Central Telegraph and Giprosvyaz research institute.
In the stuffy hallways of Russia's State Property Committee headquarters, Rozhetskin and his investment banking team eyed a rival bidder: Michael Friedman, president of Russia's influential Alfa Bank.
Last autumn the Russian government had reportedly dumped western advisers ING Barings and Rothschild in favour of Alfa and Most banks, two of Russia's rising financial-industrial powerhouses, to organize the sale of Svyazinvest.
"At about five minutes to the five o'clock deadline, it became clear there were only two of us," Rozhetskin of Renaissance recalls of that day. In his envelope, Rozhetskin held the bid from the Cyprus-registered Mustcom, a powerful and star-studded bidding vehicle for some big players: Uneximbank, Russia's third-largest bank by assets, headed by former cabinet officer and influential politician-cum-businessman Vladimir Potanin; George Soros, US-based billionaire financier and currency speculator with a mixed reputation in Russia; Deutsche Morgan Grenfell; and Morgan Stanley Asset Management.
Friedman had some serious fire power in his envelope as well. A Dutch-registered group calling itself Telefam BV Alfa put together the bid with the backing of old ally Most Bank, part of the Most Group headed by flamboyant and influential Russian banking and media tycoon Vladimir Gusinsky. Also in the group was aggressive Spanish telephone operator Telefonica, and Credit Suisse First Boston.
"It was clearly a 50-50 chance, since we'd discovered there were only two bidders by that time," says Rozhetskin. He recalls that the corridors were packed with onlookers: nervous privatization officials with Russia's State Property Committee, curious young fund managers, representatives for other western telephone operators, and jostling television cameramen. "I saw faces I knew from CSFB, Alfa Bank and Telefonica, and I even joked with Alex Knaster [CSFB managing director overseeing the rival consortium bid], that as far as numbers of people there, they had already won.
"Vladimir Malin, chairman of the State Property Committee, asked us whether we had any complaints or criticisms about the way the auction was run. Both Friedman and I responded: 'no'. I unsealed my envelope; he unsealed his. We brought the contents of the unsealed envelopes up to the auction commissioner, and then we all sat there holding our breaths for about 30 seconds."
The winner? Mustcom, with a bid of just over $1,875 million, a clear margin above both the rival Alfa-led bid of $1,710 million and the government-mandated minimum starting bid of $1,180 million. By 6:30pm, an air of triumph permeated the press conference as privatization officials announced the winner of over 4.8 billion common shares, or 25% plus one share, in Svyazinvest.
"Svyazinvest turned out to be a high-quality product, as the results of the auction have shown," says Vladimir Bulgak, vice-premier and the former minister of telecommunications.
Analysts such as Merrill Lynch's Jan Sudol had put the value of the stake at near $1.7 billion, and the winning price had logged in well above that.
But the feeling of triumph didn't last. In fact, the seemingly transparent Svyazinvest auction was just the opening salvo of an impending bankers' war which has since divided Russia's elite business leaders into savagely belligerent camps. The war became public following the Svyazinvest results, pitting Gusinsky's Most group and his allies, such as Logovaz chief Boris Berezovsky and prime minister Viktor Chernomyrdin, against Potanin's politically well-connected Uneximbank and young reformers in Russia's government such as first deputy prime minister Boris Nemtsov and privatization boss Anatoly Chubais.
Political analysts say Most and Alfa felt they were entitled to win the Svyazinvest auction after Uneximbank had earlier paid rock-bottom prices for key state assets such as Norilsk Nickel and oil giant Sidanco in the so-called robber capitalism days of privatization. Just hours after the Svyazinvest results, news reports on television channels owned by Gusinsky's Most and his allies slammed Uneximbank for including a speculator such as Soros in its consortium and the federal government for being in Potanin's pocket. Chernomyrdin intervened and called for an investigation into the legality of the Svyazinvest sale, while Potanin countered that Gusinsky himself had proposed a deal to buy Svyazinvest at a cut-rate price at an earlier, private meeting with Potanin and Chubais in France.
In fact, even bankers with the losing Alfa-Most-led consortium admit that the Uneximbank-led rivals won fair and square. Why?
"Potanin was probably as surprised as anyone that he won, because we actually had the bigger bid to begin with," says a western banking source with the group. Spain's Telefonica had contributed roughly half of the $1.71 billion bid, and had committed to roughly $200 million more. But at the last minute, "we lost some of our ammunition" when Telefonica cut back its commitment, the source says. With a higher $1.91 billion bid, the Alfa-Most consortium could have won Svyazinvest. Following the results, a Telefonica spokesman said only: "You win some, you lose some."