Questions over Landsbanki's new shareholder

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A big chunk of Iceland's second-largest bank looks destined to fall to a father and son team who made a fortune from selling their brewery in Russia. Questions remain, though, about their suitability to control the National Bank of Iceland.

On Saturday October 19, the Icelandic government's executive committee on privatization, which operates out of the prime minister's office in Reykjavik, announced its decision to sell 45.8% of Landsbanki.

The stake in the country's second-largest commercial bank is set to go to Samson Holding, an investor group whose board comprises three wealthy Icelanders who made their fortune in brewing in Russia: Björgólfur Thor Bjorgolfsson, his father Björgólfur Gudmundsson and their long-standing business partner, Magnus Thorsteinsson.

There are a small number of people in Iceland who question - quietly, given their wealth and influence - whether the father and son are suitable choices to control such a big stake in such an important component of the Icelandic economy.

Outside Iceland, Landsbanki is mainly familiar to international bond investors and banks that have helped fund its loan growth in recent years.

It has an operation in Guernsey. And its biggest international move was the purchase in 2000 of a 70% stake in Heritable Bank, a London-based bank specializing in property. Landsbanki increased its holding to 95% earlier this year and intends to use Heritable to extend its private-banking business.

The Heritable acquisition appears to intrigue Björgólfur Thor Bjorgolfsson. "Landsbanki is a tiny bank by international standards but nevertheless a footprint to grow from," he says. "Its management might be able to identify more such opportunities." Heritable's senior management is scouting now for niche acquisitions in the UK and Scandinavia.

If Björgólfur Thor has any more specific plans for the bank, other than to increase what he says has been an unsatisfactory return on equity, he isn't giving them away.

In Iceland, Landsbanki, is a big, almost iconic institution. Following this sale, the government will retain a token holding of 2.5%. The remainder of the bank's shares are widely held mainly by institutional investors, following earlier sell-offs.

Though its market capitalization is less than that of the much more efficient Islandsbanki, which emerged ahead of it from state ownership, Landsbanki is still renowned as the National Bank of Iceland. It operated as the country's central bank from 1937 to 1956. One in three Icelanders bank with it.

Is it a good idea for such a large stake in the bank to be controlled by individuals with no track record in banking? And what's the background of these people who apparently earned their fortune in the beverages business in Russia? Indeed the validity of one of their first, key acquisitions in Russia - a soft-drinks bottler in St Petersburg - has been challenged vigorously in Russian and Icelandic courts by the original owners.

Several judgments have gone against the father and son. Even within Iceland this does not seem to be well known.

There's another question. Why is it that the prime minister's office, the privatization committee, the finance ministry and the central bank seem so unconcerned by Björgólfur Gudmundsson's contribution to bringing a bank in Iceland to the point of insolvency in the 1980s?

For his part in this episode, which involved misrepresentation of the soundness of an Icelandic shipping line, Björgólfur Gudmundsson was given a 12-month suspended prison sentence by the Supreme Court of Iceland in 1991.

Björgólfur Thor Bjorgolfsson and Björgólfur Gudmundsson enjoy an extraordinary status in Iceland, partly because of the father's role in the financial scandal surrounding the shipping line Hafskip in 1985. Its collapse, and the connected near failure of the state-owned Utvegsbanki, the Fisheries Bank of Iceland, which had to be rescued by two other Icelandic banks, rocked the country's business, political and judicial elite.

But mostly Icelanders are fascinated by these men's now exceptional - by Icelandic standards - personal net worth.

This February, Heineken agreed to buy Bravo International. This is the Russian brewery the Icelandic entrepreneurs founded in 1999 with the proceeds of the sale to PepsiCo of a bottling plant they had earlier set up in St Petersburg and with the further backing of some venture capitalists.

The Icelanders had stepped in when the world's leading brewers held back for fear of the lawlessness of business in Russia. The entrepreneurs established themselves as low-cost producers with smart marketing, often using second-hand equipment that they upgraded. They developed a flair for working their way around the vipers' nest of customs, regulatory and tax authorities. And they developed good contacts in St Petersburg, including its powerful governor Vladimir Jakovlev, who has shown his support with public visits to their plants dating back to his time as deputy mayor.

Apparently coming from nowhere, Bravo had carved out a substantial share of the world's fastest-growing beer market by 2001, with large positions in St Petersburg and Moscow. For this, Heineken agreed to pay up to $400 million, the precise amount depending on the business meeting specified volume and price targets in the year to February 2003.

Icelanders are acutely conscious of their country's natural limitations. "It's always been my belief that we're on a rock in the north Atlantic and that the only way to grow is to find opportunities outside Iceland," says Björgólfur Thor Bjorgolfsson. "There are limited opportunities for wealth creation amid such a small population."

Looking outside was what he did himself. After studying at New York University's Leonard N Stern School of Business and working as marketing manager of the Viking Brewery in his native Iceland, he struck out for the wilds of St Petersburg in 1993 and didn't look back until his fortune was made. By going abroad and becoming a huge success he lived out the fantasy self-image of many of his countrymen: that of the Viking raider, an image that he himself brings up in conversation.

Now still only 35, Björgólfur Thor has returned in triumph as the archetype of a new breed of Icelandic businessman - an internationalist, an arbitrageur motivated purely by profit and not political ambition. So he appears to stand outside the old Icelandic circles of influence where politics and business closely mix.

Though still not a resident of his native country (he lives in London), Björgólfur Thor is chairman of the board of one of its biggest public companies, Pharmaco. On any given day this runs neck and neck with Islandsbanki in having the largest market capitalization of any publicly traded Icelandic stock.

He and his father acquired a 30% share in Pharmaco nearly three years ago and have been behind the deals - mergers with Balkanpharma in 2000 and with Delta this July - that have increased its market value more than ten-fold to $500 million.

"They have grown to be very rich and powerful in Iceland," says Bjarni Armannsson, co-CEO of Islandsbanki, the largest of the three Icelandic commercial banks. Islandsbanki was one of the disappointed bidders that applied to buy a stake in either Landsbanki or Búnadarbanki - the country's third-largest commercial bank which is still majority owned by the state and is also scheduled to be privatized by the end of this year - in the summer and lost out when the executive committee initially reduced the list of five bidders for Landsbanki to three and then entered exclusive talks with Samson.

Armannsson says: "Everybody here is middle class. There's very little poverty and there are no billionaires and that creates a balance that may now be disturbed. I think they have to be careful how they behave."

Björgólfur Thor says that he prefers to keep a low profile and that privacy and anonymity are what he misses most since his return to Iceland and emergence as a leading figure behind large public companies. But it seems he and his father have a strange notion of what a low profile is.

In the second week of October any visitor hoping to arrange meetings with Icelandic political, financial and business leaders would have encountered a big problem. Large numbers of them had been flown to Bulgaria in a specially chartered 747 jet at the expense of Björgólfur Thor and his father to visit the new facilities in Dupnitsa of Balkanpharma, the Bulgarian pharmaceuticals company that Pharmaco merged with in December 2000.

Magnus Thorsteinsson (l), Björgólfur
Thor Bjorgolfsson, and his father
Björgólfur Gudmundsson: The three board
members of Samson secure an agreement
to buy into Landsbanki


Friends reunited
Guest of honour on the flight was the president of Iceland, Olafur Grimsson. Björgólfur Thor had already sat in on a meeting in Reykjavik this September between Olafur and Georgi Parvanov, president of Bulgaria, which hailed the success of Pharmaco's investment in Balkanpharma. It proved "how two countries could collaborate in the business and how the economic collaboration might bring together their strategic interests," according to a summary from Balkanpharma.

Björgólfur Thor says he has no interest in politics and that he is purely a businessman and financial investor. Sitting in the temporary offices of Pharmaco, overlooking Iceland's national football stadium in Reykjavik's Laugardalur valley with the ocean and the mountains beyond, he says: "All that's done here is on the basis of what's best for shareholders."

He dismisses as a myth the conspiracy theory popular in Icelandic financial circles. This holds that the pro-free-market Independence Party of prime minister David Oddsson is engineering a transfer of Landsbanki to a sympathetic shareholder group, and that the left-leaning Progressive Party will have some say in choosing the strategic investor in Búnadarbanki.

Traditionally Landsbanki has been linked to the Independence Party and Búnadarbanki to the Progressive Party and political parties have had a say in appointing the respective banks' chairmen. But according to Björgólfur Thor those days are coming to an end. "People cannot pin us down. I don't want to align myself with anyone, nor do I want anyone to claim me."

So it's tempting to speculate what Björgólfur Thor and his father Björgólfur Gudmundsson found to talk about with the president of Iceland on the long flight to Bulgaria if not politics. Perhaps they discussed the growth prospects for low-cost generic drug makers. Certainly that's what interests the younger man.

The significance of the new plants in Bulgaria is that they have been refurbished to meet EU quality criteria, increasing the potential export market for a fast-growing pharmaceuticals company that already has a commanding market share in Bulgaria and has proven its ability to market and export generic drugs successfully in Russia and central and eastern Europe.

Perhaps the older men found other topics to discuss. Their minds might have wandered back to the convulsive last days of Hafskip in 1985 and 1986 when Olafur Grimsson, a former finance minister of Iceland and a left-wing MP, delivered fiery speeches in parliament about the scandal at Hafskip and the shipping company's managing director, Björgólfur Gudmundsson, ended up in the dock.

Politicians and bankers in Iceland shift uneasily in their chairs at any mention of Hafskip. They all know the story - books have been written about it in Iceland - they just don't want to talk about it to an outsider. Hafskip was Iceland's Guinness affair, its Enron.

Too big to handle
"It was a very unhappy time for everyone in Iceland - the business community, press, parliament, even the judicial system," says a senior member of the present government. "In the end, you have to ask whether the whole thing was a storm in a teacup, or something simply too big for the system here in Iceland to handle." He adds: "Personally, I think it was the former."

Hafskip had operated for years in Iceland in competition with the much larger market leader, Eimskip, still today one of the country's largest private companies and now a diversified transport and logistics company. In the early 1980s, the chairman of Hafskip was one Albert Gudmundsson (no relation). He had enjoyed a successful career as a professional footballer playing for some of Europe's most famous clubs, including AC Milan and Arsenal, and had returned to Iceland independently wealthy and entered politics. He carved out his own position in the Independence Party as something of a champion of the little man and attracted several ambitious politicians to his side. These were known in Icelandic political circles, somewhat melodramatically, as the secret army.

Björgólfur Gudmundsson, a leading member of the executive committee of the youth movement of the Independence Party, was prominent among these.

Albert Gudmundsson himself eventually became Iceland's finance minister. As well as being chairman of Hafskip he was also chairman of the board of its main lending bank, Utvegsbanki - the Fisheries Bank of Iceland. Björgólfur Gudmundsson was brought into the company by Albert Gudmundsson and became its managing director.

Politicians and businessmen walked arm in arm in Iceland in those days.

In the early to mid 1980s, Hafskip's competition with Eimskip was becoming increasingly intense and bitter. Both made good profits from shipping material to the American armed forces in Iceland. But when an American shipping company started to compete on this route, that lucrative business was lost.

At first Hafskip's management did not know what to do. Eventually it decided to move into the transatlantic market, shipping goods from Europe to America in bigger ships, bringing it up against the even larger American shipping companies.

These transatlantic endeavours overstretched Hafskip, which struggled to win contracts to ship cargo back from America to Europe at a time of dollar strength. Stories ran in the Icelandic press that the company faced severe financial difficulties.

Politicians on all sides saw their chance to attack a company so closely linked to Albert Gudmundsson, a prominent member of the Independence Party and a maverick who had taken an obstinate line of his own and opposed the governing coalition's attempt to merge the Fisheries Bank with Búnadarbanki. From the political left, Olafur Grimsson took up the cry against Hafskip in Iceland's parliament, the Althingi.

Hafskip tried to recapitalize through a public share issue and even sought a merger with Eimskip. It struggled on for a few months but declared bankruptcy on December 6 1985.

Hafskip was the biggest borrower from the Fisheries Bank of Iceland, the remnant of which eventually had to be folded into two Icelandic banks. In the midst all its woes, Hafskip saw the bank seize some of its key assets - its ships - and sell them to its deadly rival Eimskip at rock-bottom prices.

There began a prolonged criminal investigation and prosecution. In May 1986, police arrested Björgólfur Gudmundsson and several other senior executives of Hafskip in early-morning raids on their homes. Björgólfur Gudmundsson was detained for 28 days. It was widely regarded as a harsh over-reaction by a police force struggling to cope with an unprecedented and complex investigation into so many prominent Icelandic businessmen.

Albert Gudmundsson, now growing old and unwell, was not prosecuted.

Björgólfur Gudmundsson along with several other Hafskip executives, Páll Bragi Kristjónsson, Ragnar Kjartansson and the company's auditor, Helgi Magnússon, were charged with various counts of falsification of financial statements and accounts of Hafskip. Björgólfur Gudmundsson was also charged with embezzlement from company cheque accounts.

From the start, the whole affair tested the capacities of the Icelandic judicial system. A special prosecutor, Jónatan Thórmundsson had to be appointed. He pursued charges against 17 people. In July 1990 at the criminal court of Reykjavik 14 of them, including all those who had worked at the Fisheries Bank, were acquitted. Thórmundsson promptly resigned. The justice minister appointed another special prosecutor who appealed to the Supreme Court of Iceland for a final verdict.

When judgment was delivered in December 1991 Björgólfur Gudmundsson was sentenced to 12 months' imprisonment, suspended for two years.

It would seem to be a case the Icelandic authorities might want to bear in mind before handing over a 48.5% stake in the country's second-largest bank. But apparently it doesn't count for much. "I don't think it's a cause for concern. It was a long time ago," says Birgir Gunnarsson, governor of Iceland's central bank. "These people have shown their ability to run big businesses in St. Petersburg and in the Balkans."

Geir Haarde, the finance minister, says: "Maybe Hafskip was forced into bankruptcy. I think when he looks back Björgólfur Gudmundsson can be pleased with himself."

Skarphédinn Berg Steinarsson, a key member of the privatization committee says: "The regulator and ourselves need to go through due diligence on the investor because he has to be a sound and proper person to own a stake in the bank. We've heard all these different stories and from what we know we believe they are sound and proper."

Immaterial oversights
The CEO of one Icelandic bank says: "This was all way back. They got limited sentences for oversights that were immaterial in my view."

Björgólfur Gudmundsson himself insists the episode has nothing to do with his fitness to control a stake in Landsbanki. He says: "The bankruptcy of Hafskip contributed to the downfall of Utvegsbanki but many other troubled companies contributed as well. Let's not forget that the economic and political landscape in Iceland was completely different 17 years ago. I am absolutely positive that Hafskip's business with Utvegsbanki has no bearing on Landsbanki."

Björgólfur Gudmundsson, Páll Bragi Kristjónsson, Ragnar Kjartansson and Helgi Magnússon were accused of mis-stating the financial position of Hafskip for the first eight months of 1984 in reports to its board of directors designed to ensure that credit lines from the Fisheries Bank continued. These reports showed the balance sheet to be in a positive equity position when it was in fact negative. Björgólfur Gudmundsson, Ragnar Kjartansson and Helgi Magnússon were similarly charged with falsifying the annual accounts for the year 1984, presented in May 1985, by preparing materially incorrect accounting data, deferring entries and failing to observe accepted accounting standards. By doing so they were said to have misled its board, shareholders and counterparties as to the true extent of Hafskip's negative equity position.

Björgólfur Gudmundsson was also charged with embezzling sums from the company's cheque accounts and charging personal costs to the company. True, some of these counts in isolation look minor. He paid with a company cheque for an overseas trip for his son that was unconnected to the company, for other travel expenses, for having his carpets cleaned, for settling his parking fines and buying a car. But there were a lot of them. He was also charged with embezzling bills of exchange from the company's portfolio for his personal benefit. (He later settled these.)

Björgólfur and the other defendants were found guilty of these charges by the Icelandic supreme court judges - but only partly so. In preparation of the misleading first eight-month figures and full-year accounts of 1984, the defendants were found to have violated articles of the Companies Act, but not the more serious General Penal Code. Björgólfur Gudmundsson was found to have violated the General Penal Code over several counts of embezzlement, two of which involved fraud.

"The people running Hafskip were young, like boys that were allowed to go too far in many respects. They weren't guided enough by the banks and by others," says Arni Tomasson, co-CEO of Búnadarbanki. "I think Mr Gudmundsson has learnt his lesson. He decided it would be best for him to try his luck elsewhere, prove he can do things well and return with some dignity." He adds: "I'd have no problem doing business with them. I've not experienced anything other than positive things in dealing with them."

Halldór Kristjánsson, CEO of Landsbanki, quickly issued a statement after news broke of the forthcoming sale of 45.8% of the bank to Samson, stressing his strong support for the new shareholder group. It is, he said, "well regarded in Iceland and has an excellent record of investments both in Iceland and internationally".

In conversation after conversation in boardrooms and politicians' offices in Iceland, Björgólfur Gudmundsson is now presented as the victim. The widely held view is that his initial arrest and detention was unnecessarily harsh. The popular conspiracy theory is that Hafskip was forced out of business by reports in the yellow press and by a politically inspired hysteria whipped up against it.

Björgólfur Gudmundsson draws vindication from the court cases. He says: "After six years, 95% of the charges were dismissed and only minor technical charges were left."

Hafskip's administrators made good large portions - 65% - of its liabilities, even after the costs of administration. Björgólfur Gudmundsson attracted more sympathy by founding a rehabilitation centre for alcoholics - though this later closed down. And he gained employment at Pharmaco.

Some Icelanders explain Björgólfur Gudmundsson's rehabilitation as a sign of the country's tolerance, others of a general sympathy for those found guilty by the courts: a relic from the days when these were administered by Iceland's colonial master, Denmark.

Those involved in Hafskip are not outcasts. Helgi Magnússon, the auditor, was found to have violated articles of the Companies Act and the Auditors Act and relinquished his accounting practice, but now sits on the board of Islandsbanki.

Another interpretation is that it shows the closed nature of Icelandic society where about 20 prominent families dominate many of the leading businesses as well as the political scene. These coalesce in two groups, knows as the octopus group and the squid. Inside the octopus camp are many members of the Independence Party and some of the country's largest privately owned companies. The squid group embraces the co-operative movement and many members of the Progressive Party.

Rivalries extend within and across these groups but this is a system that ultimately protects and looks after its own, especially the chosen sons of the leading families.

Even during the years following his conviction Björgólfur Gudmundsson remained a notable figure in Icelandic society. In 1994, for example, he became chairman of KR Reykjavik, the leading football club, and he occasionally travelled with the squad on forays across Europe.

Shortly after his conviction he gained employment at Pharmaco. In 1993 he acquired Viking Brewery for a nominal sum, later renaming it Hansa.

Today everyone is hugely impressed by his new-found wealth.

To the outsider this may smack of a certain complacency, though. "Iceland is the land of forgiveness," says Bjarni Armannsson co-CEO at Islandsbanki. "This case [Hafskip] plays little importance to the general public, which is perhaps quite surprising. It could be more of a worry outside Iceland." Perhaps so.

Bjarni Armannsson's more pressing question is whether three individuals should hold a controlling stake in the country's second-largest bank. "I would have thought another bank would be a more suitable entity," he suggests. But the Icelandic competition authorities offered an opinion against the merger proposed two years ago between Landsbanki and Búnadarbanki when both were still majority owned by the state, seemingly blocking further consolidation among the big three banks.

Björgólfur Thor Bjorgolfsson doesn't believe that lack of experience in banking should disqualify him and his partners from holding such a big strategic stake in a bank. He points to the success of Pharmaco. "We're not pharmacists either," he says. "We are like your average venture capitalist that goes into situations and applies normal, practical, methods of management. You look for the causes of concern for a business and address those and make sure that opportunities are seized upon and executed well. We want to make the bank more dynamic. We'll be more active in looking at opportunities than a state-owned bank. I am not talking about explosive growth. But the bank has been quite stagnant. There's a lot of talented people in there, let's encourage them. We think this asset can perform better."

It appears he will now have his chance to make this happen, though some questions persist about his and his father's history. Rather less familiar in Reykjavik than the Hafskip saga is the dispute over how the two men really got started in Russia.

Two widely different versions of this story have been presented in courts in Russia and Iceland.

In 1991 western idealists, entrepreneurs and adventurers were swarming into Russia hoping to make their fortunes amid the land grab of the country's newly opened markets. Mostly they headed for Moscow and St Petersburg (then Leningrad). Two such were an Icelandic architect called Ingimar Haukur Ingimarsson and a British former stockbroker called Bernard Lardner. They had scored an early success in Leningrad in telephony. In 1991 foreign businessmen had to queue for hours to make international calls from one telephone in the business centre of one of the city's main hotels. Ingimar saw an opportunity and managed to find a transportable digital exchange that had been used to restore communications in Kuwait during and after the Gulf War. With this he helped set up PeterStar which was later sold off to Nasdaq-listed Petersburg Long Distance, a deal on which Lardner worked.

In late 1992 they were eager to repeat this success and saw an opportunity in soft-drinks bottling at a time when Russian consumers were eager for all things western and high quality. The market was ripe for transformation: Coca-Cola and PepsiCo were still importing, not producing and bottling locally, and local producers were turning out dull, ill-flavoured drinks in unattractive bottles made from returned glass in old, under-funded plants.

Birth of a Baltic bottling plant
Ingimar had met Björgólfur Gudmundsson while doing some work in Iceland for the charity for alcoholics. Now at Pharmaco, Björgólfur Gudmundsson was working for Gosan, a wholly owned subsidiary active in soft drinks that was decommissioning equipment that would be perfect for the venture in St Petersburg.

The Baltic Bottling Plant venture was founded. Ingimar and Lardner were the representatives of a British Virgin Islands-based holding company, Baltic Group Ltd - later it would be alleged the sole owners of BGL - which took up 75% of Baltic Bottling Plant in 1993. The newly privatized local repair company RMZ took 25% through the capital contribution of a plant on the city's outskirts. BGL signed agreements with Gosan to supply the bottling production lines and management expertise.

Ingimar Ingimarsson became the chairman of BBP and Björgólfur Gudmundsson, as a representative of a key supplier to which the company would owe considerable sums, also joined the board. BBP hired Magnus Thorsteinsson, a former executive at Gosan, to be managing director of BBP and Björgólfur Thor Bjorgolfsson, head of sales at Gosan, to run marketing and sales.

Later, in 1994, Björgólfur Thor Bjorgolfsson was appointed managing director after Magnus Thorsteinsson left the company.

In its first two years of operation BBP struggled. Why it did so is one of the many areas of dispute between Ingimar Ingimarsson and Bernard Lardner on one side and Björgólfur Thor Bjorgolfsson and his father on the other. The BGL side claims late delivery of equipment and poor performance by Gosan. The Gosan side suggest a mis-reading of the market by BGL as well as the unsuitability of the factory BGL had acquired and difficulties with water and electricity supplies.

Whatever the case, prospects were looking up by 1995. BBP by now had a contract to produce and bottle Pepsi-Cola, BGL had bought it new production equipment and the company was set to move into alcopops (pre-mixed low-alcohol drinks) under the brand name BRAVO.

Relations between the two key groups - the owners, BGL, and the executive managers who had joined from Gosan - continued to deteriorate. According to Lardner and Ingimar, Björgólfur Gudmundsson argued that he and his son should be made shareholders in BBP, a company after all being built by their efforts. Björgólfur denies this story.

At this stage the two sides' accounts start to diverge wildly. And they have traded allegations in court hearings in Russia and Iceland.

In September 1995, at a BBP shareholders' meeting not attended by either Ingimar or Lardner, two contracts were produced apparently signed by Ingimar on behalf of BGL handing over 32.5% of Baltic Bottling Plant to Björgólfur Gudmundsson and another 32.5% to Viking Brewery. BGL was to receive $500,000 in return.

The document was apparently signed six months earlier in March 1995 at the time of the company's annual general meeting of shareholders in St Petersburg. Lardner and Ingimar did attend that earlier meeting but they say no such documents were signed or even discussed there.

There was a rather strange clause in the contract demanding that the March signatories should keep quiet about it until September 25, when it was to come into effect.

In early October 1995 the new shareholders (Björgólfur Gudmundsson and his company Viking Brewery) were registered at the chamber of companies registration in St Petersburg. Thereafter, armed guards denied access to BBP's offices to Ingimar and Lardner.

Suddenly they found themselves on the outside looking in.

Björgólfur Thor (far right) next to Vladimir Jakovlev
and Ingimar Ingimarsson (centre): The powerful deputy
mayor attends the inauguration of Baltic Bottling Plant
at Parnas St Petersburg in July 1995, just months
before a bitter dispute over its ownership breaks out
between Björgólfur Thor and Ingimar
A bitterly disputed document
Ingimar and Lardner have claimed repeatedly in courts in Russia and Iceland that the contract to sell shares in BBP was a forgery. Björgólfur Gudmundsson and his son have insisted it was genuine and that Ingimar Ingimarsson had initiated the sale at a time when he was losing his faith in BBP's prospects but did not want Lardner to know this.

Certainly Lardner and Ingimar were sounding out potential buyers in 1995 - but they say that they hoped to get a lot more than $500,000. In December 1995, John Tyce, senior investment analyst at Société Générale Strauss Turnbull Securities, offered a rough valuation of the business at $15 million to $20 million. Lardner says he had conducted due diligence with one potential Swedish buyer who was prepared to pay up to $20 million.

Numerous court cases ensued in Russia. BGL strove to invalidate the decision of the September 25 shareholders' meeting of BBP to recognize the new shareholders. It then pursued the registration chamber of St Petersburg to invalidate the registration of the new shareholders.

Despite occasional setbacks, BGL won these cases, which were then appealed upwards from the arbitration court of the St Petersburg and Leningrad oblast to the federal arbitration court of the north-west circuit. This court confirmed the invalidation of the shareholders' meeting on September 25 and the registration of the new shareholders.

Meanwhile BGL was itself pursued through the courts by former Russian partner RMZ requesting the original founding of BBP be invalidated. When these appeals were rejected, Lardner and Ingimar returned to the offices of BBP in March 1997 to find them empty. The plant was gone, the assets of the whole operation had been moved on. BBP was history. In fact it was almost written out of history.

Under the dynamic leadership of Björgólfur Thor Bjorgolfsson, Bravo - the new company name was the same as the brand of alcopops produced by BBP - went from strength to strength in bottling soft drinks and brewing beer. Eventually it sold out to Heineken for the fabulous sum of up to $400 million.

Along the way Bravo attracted financial support from some of the most prestigious names in international finance, including Deutsche Bank and the IFC, the World Bank's private-sector lending arm. IFC officials have privately said that backing Bravo was their best ever investment in Russia.

Meanwhile the much disputed contract to sell shares stipulated that it was subject to Icelandic law and so the case ended up in the district court of Reykjavik in September 1999. BGL once again pressed its claim against Björgólfur Gudmundsson that the contract of sale be declared invalid.

Ingimar Haukur Ingimarsson testified that he did not sign the contract, the original of which has not been produced, only copies. Björgólfur Gudmundsson testified that Ingimar did enter into the agreement in March 1995 because he wanted to get out of the company, which only turned profitable later in the year.

In the end the case came down to technicalities. BGL argued that, according to the articles of association of BGL, Ingimar did not have the power to sign over shares owned by BGL in Baltic Bottling Plant. Björgólfur Gudmundsson disputed this, claiming that Ingimar and Lardner were in effect the owners of BGL and that they had blanket powers of attorney to sign contracts on its behalf. The district court of Reykjavik decided that it could not be maintained, over the denial of the plaintiff [BGL], that Ingimar Haukur Ingimarsson had due authority to make the contract and that the contract must therefore be voided.

The court case dealt only with the validity of the contract, not any claim for damages. Lardner and Ingimar say a legal attempt to claim damages has been under consideration since that judgement in December 1999 but has not been launched because of unforeseen difficulties tracing authoritative accounts that might establish the financial position of Baltic Bottling Plant - and its actual worth - in 1995. Another court action is still a possibility.

What does Björgólfur Thor Bjorgolfsson make of all this now?

Chaos theory
"It's a case of greenmail," he says. "It's a complex issue of people abusing a BVI [British Virgin Islands registered] company and trying to greenmail us. He owns the company and suddenly says he doesn't have authority to sign a contract. Powers of attorney are suddenly revoked." He shakes his head.

Björgólfur Thor looks back reflectively on those early years in St Petersburg. "We were so naive in those days," he says. "This was Russia and it was chaos. And this is an attempt to take advantage of that chaos." He recalls: "We had an Icelandic party supplying equipment [Gosan], a Russian party [RMZ], us running it and these other people who were supposed to bring lots of contacts and market knowledge and didn't." He adds: "It was certainly the worst period of my life. I was the managing director coming to the plant every day not knowing how I was going to pay the staff."

Does he feel the court cases are still hanging over him? Björgólfur Thor says he has never made a secret of the bitter dispute with Ingimar and Lardner, though it is not well known in Iceland. He cites an old Icelandic proverb to the effect that "we're hard-pressed to get into a conflict but pretty feisty once we're dragged into one."

Nevertheless he conveys a sense of disappointment that the issue should still be dragging on. "Listen, we have won court cases and they have won court cases but there's never been a final case to settle it all." He says it has taught him a valuable lesson. "I don't ever want to take people to court again or have people take me to court. We are very cautious on due diligence and take a good look at the characters we are dealing with."

In the meantime, Ingimar has sent exhaustive written details of his version of events in St Petersburg to many parties that have done business with the father and son or lent money to them: KBC Bank, Raiffeisen Zentralbank Österreich, Deutsche Bank, Hermes, Merrill Lynch (investment banking advisers to Björgólfur Thor), Heineken, IFC and others.

For the first time a note of indignation creeps into Björgólfur Thor's voice. "Can you imagine?" he says. "This set off a lot of alarm bells and suddenly we had compliance officers from these institutions all over us." He concludes defiantly: "We came out of all these checks clean."

For his part, his father does not think the Hafskip case is an obstacle either. He says: "Hafskip's business with Utvegsbanki has not even been mentioned - by the government, regulators, the media or in the Althingi - in relation to Landsbanki. After we wrote to the government registering our interest in Landsbanki, ministers not only welcomed this, they urged us to go ahead."

Yet one last check may remain before the two men take effective control of the second-biggest bank in Iceland. The Financial Supervisory Agency (FME), the country's lead bank regulator, must approve any shareholder bidding to control more than 10% of any Icelandic bank.

FME director general Páll Gunnar Pálsson refuses to comment in any way on due-diligence investigations into any present or prospective applicant to own 10% or more in an Icelandic bank.

The law mentions seven key factors the FME should look at when assessing the eligibility of any applicant. These include: the financial position of the applicant and parties with which he has close links; the knowledge and experience of the applicant; whether such a holding creates risks of conflicts of interest; the size of the holding; whether such a holding might make surveillance of the bank by the FME more difficult; whether the applicant has provided the FME with all relevant information backed up by documents; any punishment to which the applicant has been sentenced and whether he is the object of a criminal investigation.

So does the regulator make a broad assessment looking at these factors as a whole, or does the applicant have to pass on each single one? Páll Gunnar says: "It's an overall assessment, but it could suffice for a denial if an applicant does not pass one of these factors, if the circumstances justify." He sums up: "The key question is: 'Is the applicant a sound and prudent owner? Would the bank be OK?'"

The FME has to make its decision within one month - dating from receiving complete information and documentation from an applicant. This relates to the applicant's financial position and funding of the proposed investment, future plans for the bank, proposed commercial relationship with the bank, the applicant's experience of financial activities, the applicant's links to other entities and any court sentence the applicant might have received.

The clock is ticking and the FME will have to make a decision before the end of November. David Oddsson, the most powerful man in Iceland, has invested considerable political capital in this deal. Now that the privatization committee, in which the offices of the prime minister, finance minister, foreign minister and minister of commerce and industry are key voices, also appears to have blessed it, won't the FME be under some political pressure to wave it through?

On this point, Páll Gunnar gives a firm answer. "We are very independent from political pressure."

What international investors, lenders, counterparty banks and regulators make of it all remains to be seen.