Hunters for situations
The Investment Company A1 is again among the media reports, e.g. “court has arrested the shares”, “debts have been bought up”, “managers have been fired” – just like in olden times when the Company was called "Alfa-Eco". This is nothing if not on purpose: A1 is coming back to the business of special situations.
President of A1 Mikhail Khabarov talks about the crisis with pleasure: “For such investment companies, like ours, there is nothing better than a period of perturbation, when the economy drops, and then rises just sharply. And if there is no escape from the crisis, A1 will become one of its beneficiaries.”
Here is a portrait of this beneficiary, made according to Mr. Khabarov. Small (100 employees), but very mobile structure that can, if necessary, within a day make a decision on participation in the project and send the team to any city of the country. “For example, on the 30th of December we received a call: “A decision to appoint new management has been made, and there is a need to take an operational control of the company. We had taken all decisions, allocated funding, assembled a team of 10 people which departed to the city on December 31, and took control,” says Mr. Khabarov. “Our business processes are exceptionally fast, both internal – when the decision is taken by the Investment Committee (within one hour) and external – when decisions are taken by shareholders (within a day). If A1 had another shareholder structure, it would not work,” he said. “They like to do it and, if necessary, approve multimillion-dollar investment, just talking to me by phone.
In A1 we have a rather informal and not bureaucratized Board of Directors. Rapid decision-making is essential for our business”, confirms Mikhail Fridman, the co-owner of Alfa Group. “The shareholders do not have MBA, but possess a great experience", Alexey Kuzmichev, other co-owner of Alfa Group and the A1 Board of Directors Head, says smiling.
Last three years, A1 utilized its speed and experience that will be useful to it for a future crisis, mainly in order to clean up consequences of the past. Then-President of A1 Alexander Savin remembers even the day when all it started: “It was February 8, 2009. I was driving somewhere in my car when received a call from a shareholder who said that there were a large number of troubled borrowers in Alfa Bank, and he needed a help to figure out how to live and work in such situation.
And starting from February 8, I spent 60-70% of my time to resolve this problem until I left the Company.”
This is how ADA – Alfa Distressed Assets Foundation has appeared. It borrowed from Alfa Banking Group (which includes other banking structures apart from Alfa Bank), repurchased mortgage assets, sold them and repaid its loans. A1 was hired to manage ADA. It received a monthly management fee, tied to the value of the assets, and at the sale of any asset – the percentage of a transaction: from 5 to 15%. A1 is not a collection agency. It was not involved in debt collection, emphasizes Mr. Khabarov: If required, the bank itself had legal proceedings with debtors and turned pledges into its property. Thus, A1 got under its control the bad assets of the whole group for almost $2 billion, including about $1 billion accounted for Alfa Bank.
Large assets were few: three buildings of MIAN’s (now Kopernik), a Tyre manufacturer Amtel-Vredestein, Donetsk Electrometallurgical Works (owned by Vadim Varshavsky). The others are small, scattered assets: wagons, unfinished real estate and others “Under the terms of cooperation, A1 had no right to select what it liked to do and what not. It was a complex decision”, says Mr. Khabarov.
Most trouble we had with small assets. At the end of 2009 Alfa Bank got 2,000 wagons belonging to Far Eastern Transport Group and several smaller rail operators. It was very difficult to sell wagon fleet by parts at a good price and in a crisis: ready business was significantly more expensive. On the basis of these assets A1 established a company A-Trans which began to work in 2010, and was sold to a “group of private investors” in mid- 2011. According to InfraNews CEO Alexey Bezborodov, currently A-Trans is owned by structures associated with Rusagrotrans.
ADA had complex real estate and unfinished construction assets, says Managing Director of A1 Andrey Von. Assets of the largest Ural dealer Verra-motors were handed over to A1. In Tyumen there was a huge unfinished dealership for Toyota and Lexus with total area of 35,000 square meters per 10 hectares. One of the buildings with the area of 6,000 square meters had already been finished, and A1 started selling Lexus in Tyumen. Less than a year later the business was bought by Japanese Mitsui. It was more difficult with the second building: the facility required additional construction work, but car dealers were not interested in the premises. A1 ordered a study for the best use of the asset. It turned out that the best use was a shopping center, rather than a dealership. We were looking for buyers not only among dealers, but also among developers.
“Indeed, we incurred losses on very small projects, but recouped losses and earned on larger ones", says Mr. Khabarov. More than $800 million have been brought by three largest projects: Donetsk Electrometallurgical Plant was sold to Mechel for $500 million, three buildings of MIAN, including Business Center Northern Lights, located on Pravda Street in Moscow, yielded $140 million, and Amtel-Vredestein was sold to Sibur for $170 million.
Last ADA transactions were closed in 2012. We shook hands with Alfa Bank and closed the projects," says Mr. Khabarov.
Before the crisis, in the period of overall growth, A1 had actually worked for five years as a private equity fund, opened and bought new businesses (see extract). “Yet, direct investments are for a different class of investors with different expectations of return, when one can just sit aside waiting for growth, Mr. Fridman explains now. “ And we have another specialization. Well-adjusted corporate machine does not exist in this country in our circumstances. There are constant corporate wars, conflicts; impairment of minority and majority shareholders’ rights, and it’s endless. I believe that we have a great space for our activities.” He hired Mr. Khabarov in order to earn on these conflicts, as in the olden days.
Here is one of such conflicts. Recently, the Cyprus court has removed an attachment from the shares of OJSC Kameny Most and Kremlin Site owned by A1. These companies possess on a leasehold base one of the most promising plots of land: 3 hectares on the Sofia Embankment, between the Bolshoi Kameny Most (the Big Stone Bridge) and the British Embassy, directly opposite the Kremlin. Two years ago this land formed the basis of a criminal case against the former State Duma deputy Ashot Yeghiazaryan, initiated by his ex-partner and university friend Michael Ananiev. The parties offer different explanations on what was the matter.
Lawyer Ruben Markaryan stated Mr. Ananiev's version. In 2008 Yeghiazaryan and Ananiev agreed to exchange assets. Yeghiazaryan asked Ananiev to make over to his wife and a friend a controlling stake of JSC “Invest Center” (beneficiary of Europark, Respublikansky Bank and so on) managed by Ananiev, in exchange for the office center “Daev Plaza” and 50% in two companies that rent three hectares of land on the Sofia Embankment. Agreement with Mr. Ananiev was signed by Mr. Yeghiazaryan’s proxy Vitaly Gogokhiya, who at that time had all authorities to do so (Vedomosti has a copy of the agreement). Ananiev fulfilled his part of the agreement, but Yeghiazaryan did not. This behavior caused the criminal fraud case. In 2011 in the midst of the criminal investigation against Mr. Yeghiazaryan, Cyprus company Brookemil (which owns Kameny Most and Kremlin Site) after negotiations decided to fulfill obligations to Mr. Ananiev out of court, and transferred to him 50% in two companies. In his turn, Mr. Ananiev did not want to stay in the project, which required additional investments, and sold the shares. Thus, the structures of Alfa Group appeared on the Sofia Embankment.
Mr. Yeghiazaryan (who lives in the USA now) could not be reached for comment. Dmitry Dergachev, a lawyer of the Offshore Company Brookemil, said Vedomosti that nobody agreed upon any transaction. The document assuming the exchange of assets, dated 16 May 2008 and signed by Mr. Gogokhiya, who allegedly acted under the Brookemil’s power of attorney, was a forgery. Mr. Gogokhiya denies the existence of such a document, and in this regard even applied to the General Prosecutor's Office in December 2010 (Vedomosti has a copy). And everything that happened later is a raider seizure (illegal takeover). 25 May 2011 Authorized Director of the Offshore Company Brookemil, while being in Austria issued to LLC Burgaus a power of attorney to make transactions on behalf of Brookemil, as well as exercise the rights of shareholders of OJSC Kamenny Most and OJSC Kremlin Site. 14 July 2011 Burgaus in its turn issued a power of attorney to Russian citizen Mr. Erokhov. Based on these documents, there was a change in the Brookemil’s Board of Directors, and 50% of the companies’ shares become owned by Mr. Ananiev. And he has sold them.
Later Brookemil publicly rebut alienation of the shares, and still calls itself the owner of the companies. Mr. Markaryan gave the following answer to the question of why Brookemil first "voluntary performed its obligations to Ananiev”, and then decided to declare itself to be the controlling shareholder of the two companies: “When Alfa appeared in the project, a conflict clashed between Brookemil’s beneficiaries with subsequent change of management.”
It is not clear who was right. It is important that the attachment, imposed by the Cyprus court on shares in respect of the Brookemil’s claim, was removed. According to Mr. Khabarov, A1 was completely convinced in the legality of these assets’ (Kameny Most and Kremlin Site) seller, otherwise it would never “buy a ticket to this war”. And that A1 managed to consolidate “a substantial part” of the assets’ indebtedness. Now it is negotiating with the Moscow Government on the best use of these 3 hectares on the Sofia Embankment: “For the City Mayor’s Office it’s important that it will be beautiful over there."
A special situation is by no means always a conflict between the company’s shareholders, explains Mr. Khabarov. “Debts, bankruptcy, poor management are also special situations.” The essence is that: any asset held in a special situation is always purchased at a discount, and then, after the consequences of such special situation are eliminated, it is sold at "a fair price".
The Investment Company has not yet decided when A1 leaves the Sofia Embankment, but probably, not before the time when the Moscow Government approves the draft of the site development. In fact, the project's cost will grow at least twice after that: The Kremlin is nearby. Shares and debts are in one hand. There is approval from the City Mayor’s Office. Just come and build – the facility in such a state must be expensive. Currently, the asset is estimated at no more than $200 million.
Cooperation with the City Mayor’s Office with regard to the Sofia Embankment has brought another project to A1, and we may leave it before the end of the year. Property Department decided to sell 66.6% of OJSC Moscow Tyre Plant (MTP). “Finding out the news, we told them that it would be difficult to sell the asset in that state at a fair price”, recalls Mr. Khabarov. MTP is a bankrupt. Tires have not been manufactured there for a long time, and the company leases real estate – it owns buildings with a total area of 86,000 square meters, as well as three land plots of 7.4 hectares. The enterprise has allegedly been made bankrupt by its CEO Alexey Gurin, who is now under investigation. Structures indirectly related to him owned 29.17% of MTP and the enterprise’s debts.
In March 2012 bankruptcy proceeding was opened against MTP for a period of six months, it means that most likely its property would be sold by auction in September, and the City Mayor’s Office would really be left with nothing. According to Mr. Khabarov, A1 has consolidated shares and debts amounting to $20 million. A deal was announced in August 2012. How did the Company manage to convince the former owners to part with the property? Mr. Khabarov says that in such cases more often a proposal to get money here and now appears to be more attractive than a prospect to get it "maybe someday". Vedomosti could not reach Mr. Gurin’s representatives for comment.
A1 has also become the Department’s authorized agent to search buyers for its share – 66.6% of MTP’s voting shares. According to the Department’s spokesman, the decision has been made after the investment company became a co-owner of the enterprise. Bidding on Moscow package will be held in November 2012.
Facilities on the territory of MTP can be demolished, and new shopping and office centers can be built. “Fair value” of the asset is estimated to be $120 million together with debts.
Mr. Khabarov does not exclude that A1 may implement some more projects with the Moscow Government. Municipalities, regional administrations are prospective partners, says Mr. Khabarov: “They have a lot of bad assets that can be sold, but they do not want to sell cheap, and unable to sell expensive. And this is also our market.”
A1 itself was a troubled debtor of Alfa Bank. By the crisis A1’s debt to Alfa Bank has reached $300 million, and the value of pledged assets has naturally fallen. In 2009 Alfa Bank agreed to restructure the debt on condition that A1 would pay it a dividend of 25% of its profit within the next five years.
In 2011 the investment company’s debt to Alfa Bank was reduced to $150 million, says Mr. Khabarov. Then the consortium Alfa Group contributed to the investment company’s charter capital $100 million, which were immediately used to repay the debt to Alfa Bank. A1 closed the remaining debt of $50 million, by refinancing with another bank. “We were able to get a loan on more favorable conditions than in Alfa Bank,” explains Mr. Khabarov. “Cooperation between units [of the consortium] is based solely on market conditions. We work, if they are profitable, and do not work, if they are unprofitable."
Here are a couple of transactions that A1 closed during Mikhail Khabarov’s presidency. A1 owned 50% of CJSC Vlakra’s voting shares and about 14% in OJSC RN-Vlakra which possessed immovable property in the territory of Machine-Tool Plant “Red Proletarian” located in Shabolovka. Rosneft was the second largest shareholder and wanted to combine two legal entities. A1 resisted, but finally Rosneft bought the shares from A1. “We went out with a profit”, says Mr. Khabarov.
A1 has acquired 60% of Novgorod Corporation SPLAV. One of the co-owners of the enterprise that manufactured equipment for Rosatom was wanted by police, and another was in prison. A1 has replaced SPLAV’s management, and now is engaged in restructuring the debt. The enterprise can be bought by Rosatom: at least Nikolay Vinnichenko, Presidential Envoy in the Northwest Federal District, said that such development was desirable.
How Everything Started
In the late 1980s Mikhail Fridman (who graduated from the Moscow Institute of Steel and Alloys (MISA) Non-Ferrous and Rare Earth Metals Faculty), as well as several his comrades from university went into business in the wake of the cooperative movement. They decided to arrange a food delivery in Moscow district Belyaevo (where a student hostel was located) and established a cooperative society Courier. The experience proved unsuccessful: they had to spend a lot of time in huge queues in shops, and food could not be stored long as it spoiled. “As to buyers, — they signed food contracts with us because they wanted to obtain scarce goods, rather than because they were unwilling to stay in long queues," recalls Mr. Fridman’s partner Alexey Kuzmichev. It was a concept mistake.
Then a new idea appeared. “From own experience we knew, that students were always ready to earn", says Mr. Kuzmichev. “In spring time all windows in Moscow were dirty, as people stopped working for free on voluntary clean-ups (Subbotnik). We decided to move it to market relations, invited students to wash the windows and paid them for their work.
The Partners started with the Research Institute located on Leninsky Prospect: they signed an agreement, washed all windows over there for a week, and got 2,000 rubles. A lot of students wished to perform this work: At that time study allowance amounted to 50 rubles, but working in "Courier" for four hours, one could earn 10 rubles. Officially Mr. Fridman was on the staff of Research Institute for Non-Ferrous Metal Treatment, but he did not appear at work, and left his salary to the Institute. Cooperative society brought him huge at that time money — 10,000 rubles per month.
One spring day in 1998 Mr. Fridman happened to meet German Khan, the other former student of MISA (he studied at junior year). Turned out, that Mr. Khan had also managed to do business: His cooperative society was engaged in tailoring jeans and T-shirts and selling them at the Rizhsky Market in Moscow. From that day, the old institute friends started meet more, and then decided to work together.
Soon Mr. Fridman and MISA's teacher Oleg Kiselev established a new cooperative society Alfa-Photo, headed by Mr. Kiselev: Young entrepreneurs were assisted by Professor Mikhail Alfimov, who then worked in the Institute of Chemical Physics RAS. He provided them with space for office in a power shed on the premises of the Institute, located at Novator Street in Moscow. They started producing photochemistry and high impact polystyrene.
And when the country “trended to create Joint Ventures for attracting foreign investments” (JVs were granted with various tax incentives), Alfa-Photo established JV Alfa-Eco.
Kiselev, Fridman, Khan, Kuzmichev and two other MISA’s graduates Mikhail Bezelyansky and Andrey Shelukhin became the co-owners of the joint venture.
Each partner was in charge for a separate area in Alfa-Eco: Khan headed the wholesale trade, Kuzmichev – the international department, Mikhail Bezelyansky (who used to manage a warehouse of Book World store) – the marketing department, Andrey Shelukhin – the Czech Office. Teacher Kiselev became CEO of Alfa-Eco. “I was in charge for external relations, just because, as a former radio operator I could adjust telegraphic communication with the outside world,” – jokes Mr. Kuzmichev. “We found premises on Novy Arbat and with the help of the Academy of Science managed to get official permission to have one phone number with access abroad. There was a fax machine connected to this phone number.
First, in partnership with the company “Soviet Carpets” we started export supplies of handmade carpets from the Transcaucasian Republics.”
Mr. Kuzmichev still remembers details of carpet business: Old carpets were more expensive than new ones, and in order to wear out the product we had to wash off the excess paint. The Head of International Department found two partners in Germany who had carpet washing machines, and we started working with them. “Then we decided to launch a supply of cigarettes, but…” as Mr. Kuzmichev says “...had no idea of where to purchase them. A girl was hired to look for addresses and phone numbers of tobacco manufacturers worldwide. We paid her 2 rubles for one address. We made calls to all tobacco companies in America, asking to send us a batch of cigarettes. Americans were surprised when received a call from Russia,” says Mr. Kuzmichev smiling. The first tobacco deal was Marlboro. We can say that Marlboro appeared in Russia because of Alfa-Eco. We left tobacco business when quotas and privileges on the import of cigarettes were received by the National Sport Foundation and Russian Orthodox Church — it was a measure of state financial support to various social institutions, backed by the Decree of President Boris Yeltsin.
1992 was a turning point for Alfa Eco. Oleg Kiselev left the Company, as he decided to start his own business. He was succeeded by Alexander Fayn, former Chief Designer in one of Engineering Design Bureaus, who stays as CEO of Alfa-Eco up to the present time.
Mr. Fayn is a writer. He published a collection of short stories and novels “Boys from Kolyma” in 2008, as well as the book “I am Sorry, my Red Sunshine” in 2009, and was awarded the literary prize named after Anton P. Chekhov. Recently, yet another book has appeared. “Literary Gazette” published the opinion of the writer Edward Prosetsky: Alexander Fayn titled his book very precisely, — “Among the people”. It reflects the rich and very difficult experience of the author, including golden youth of Moscow fellow who fond of girls and keen on sports, as well as bitter experience of Kolyma resident who discovered the rules of Stalin’s GULAG, and later – cruel laws of Russian business at the time of our wild capitalism.”
A1 Track Record, Presidents
“My position is creative,” says the current President of A1 Mikhail Khabarov. “I am responsible for all business and business solutions.” In A1's history there were seven such creative personalities:
In 1989 Mikhail Fridman, together with his friends at the Institute of Steel and Alloys (MISA) German Khan, Alexey Kuzmichev, Mikhail Bexelyansky and Andrey Shelukhin, as well as their teacher Oleg Kiselyov created a cooperative shop Alfa-Photo. Soon the country “has trended to establish Joint Ventures in order to attract foreign investments,” such JVs were granted with various tax incentives. Alfa-Photo created a Joint Venture with a Swiss citizen of Russian origin Anatoly Potik — Alfa–Eco. Gradually, Alfa-Eco became a major trading firm. “We were engaged in delivery of scarce products, because in the early 1990s such products as tea, chocolates, cigarettes and alcohol were unavailable“, — Mr. Kuzmichev recalls. Alfa-Eco imported perfumes produced in France especially for the Russian market, and even created special bottles for such perfumes and distributed them through Roshalantereya “And then," as Mr. Kuzmichev says, “We wanted something else.” Alfa-Eco began to sell not only consumer goods, but also oil.
Mr. Fridman became a president of Alfa-Eco after Oleg Kiselyov left the company in 1992. That year was a turning point for Alfa-Eco. The company received the status of special exporter and began oil trading. There was created a trader Crown Resources with headquarter in Zug, Switzerland, and offices in London and Gibraltar. “I then worked abroad preparing sales contracts,” Mr. Kuzmichev says. “The first contracts were signed by state exporters.” “Working with them I realized that the contracts signed in the Soviet Union had no relations to the trade agreement.” There was no concept of risk. Soviet trade associations were not aware of such concepts as letter of credit, basis of delivery, etc. Emergence of commercial companies allowed developing of foreign trade from scratch."
“Anything could happen, but we had a principle: Neither agree nor negotiate with criminals,” says Mr. Kuzminchev. “It was the only way to save one's business.” “As you can see, we are all alive, and I am unguarded.”
Mr. Fridman was president of Alfa-Eco, but more engaged in Alfa-Bank. In 1993 he finally left operational management and remained to be a member of the Company’s Board of Directors.
Under Mr. Bezelyznsky Alfa-Eco started construction of retail chain. The Company bought several premises suitable for launching the sale. Business Plan was written with the help of foreign advisors – French Casino. Position of CEO was offered to Arkady Novikov, but he refused, deciding to focus on the restaurant business. The chain was headed by Alexander Kosyanenko, who also had graduated from MISA. The first Perekrestok (Crossroad) supermarket was opened in September 1995. After series of mergers and acquisitions, Perekrestok Supermarket became X5 Retail Group, today it is number one in terms of revenue on the Russian retail market. In 1998 Mr. Bezelyabsky decided to sell his stake in Alfa-Eco. In 2003 speaking to The Company Magazine he explained that his projects in Alfa-Eco faded into the background after his purchase of TNK in 1997. “Personally I was not interested in oil business, and I did not want to become a passive shareholder." Along with him Mr. Shelukhin decided to leave the business. Final settlement occurred in the year of 2000 when Bezelyansky and Shalukhin established retail chain Mosmart. But it could not survive the crisis of 2008 and went bankrupt.
1996-1999, petroleum expert
“I deeply convinced that any conflict is beneficial. Why? Because in a conflict situation the management is concentrated and starts working more vigorously and intensive,” as Mr. Khan said sometime to Vedomisti. During his leadership Alfa-Eco got involved in several corporate wars.
Alfa-Eco decided to switch from oil trading to the purchase of assets, and participate in the privatization of Sidanco. “We realized that the next step was to buy assets <...> said Mr. Khan. “When shares-for-loan auction machine started working, we decided to participate in this process, and the only real opportunity appeared with the sale of Sidanco. But here Alfa-Eco was to fail. The main contender for Sidanco was Vladimir Potanin. “He then offered a compromise to Mr. Fridman: You are not competing with us for the package of Sidanco, and in exchange we'll sell you about 30% of <...> said Mr. Khan. “But <...> we had no time to formalize our relationships with the partners <...> After all, we were friends." As a result, Alfa-Eco paid money, but did not receive the needed participation in the management of Sidanco. “After a while, Mr. Potanin said: “Let us pay back your money, we do not wish to have you as partners,” recalled Mr. Khan. Potanin paid cancellation compensation to Alfa (according to different versions from $60 million to $100 million) for a third of the company. And he soon received from BP $571 million for 10% of Sidanco (plus 20% in control). Alfa-Eco took its revenge in the crisis of 1998. It had brought debts and shares of Sidanco’s subsidiaries, and started bankruptcy of them, and then Sidanco itself. By that time Alfa-Eco has already had TNK. In 1997 Alfa-Eco together with Renova (Victor Vekselberg and Leonard Blavatnik) bought from the State at auction 40% of TNK shares. During the next two years the partners consolidated 99.9% of TNK.
In 2001 after the “exhausting war” (courts, attachments/arrests, tax audits, etc) Alfa-Eco’s shareholders bought from Interos the remaining package of Sidanco. At first it was merged with TNK, and then TNK established a joint venture with BP. Today, Mr. Khan is an Executive Director of TNK-BP.
1999-2003, Communication man
At Mr. Khan’s presidency Alfa-Eco was fighting not only for oil but also for metal. Most known wars were made for control over large iron and steel enterprises: West Siberian Metallurgical Plant (Zapsib) and Achinsk Alumina Refinery (AGK). These projects were led by Alfa-Eco CFO Gleb Fetisov. During the crisis in 1998 Mr. Fridman offered him to be the president and co-owner of Alfa-Eco. The strategy of those years is as follows: Buying debts and shares devalued due to a corporate conflict, the Company entered an enterprise, got access to management by debilitating lawsuits, and then sold its share at a higher price. For example, income from sale of the share in AGK was 680%, in Volgograd Steel Works Red October — 253%, in Korshunov Mining Plant — 161%, in TAGMET — 79%. Competitors preferred to stay away from Alfa-Eco, even when the latter not yet started to contest anybody: “We had only to simulate an interest in any asset in a professional way, as immediately appeared those who wished to pay compensation,” as Alfa Eco managers recall.
“We began to look closely to and negotiate with companies. And then, it dawned on me: Why don’t we venture the best? We shall speak to one of the mobile communication leaders VimpelCom. “I asked my university friend to introduce me to Dmitry B. Zimin”, said Mr. Fetisov. Mr. Zimin was tired of confrontation with the Minister of Communications Leonid Reiman, and, in general, was ready to sell his share. After a series of acquisitions, VimpelCom became an international operator, ranked sixth in the world in terms of subscribers. Later, Alfa Bank bought a fix line and internet provider Golden Telecom. In 2004 telecommunications assets of Alfa Bank and Alfa Eco were allocated into a separate unit Alfa Telecom (later renamed as Altimo), where Mr. Fetisov got 14.35%. Mr. Fetisov left Alfa Eco when its owners decided to change strategy: to develop the Company as a private equity fund, that seemed "much easier than engaging in conflicts.” Mr. Fetisov believed that it should stay in business of special situations.
In the Company’s history Mr. Savin was the only person from outside with MBA, who became the head of the Company. Before joining Alfa-Eco, he worked in the consulting company Bain & Company, where was in charge for projects related to direct investments, as well as advised Alfa Group in one of the transactions. “Offering me a job, the shareholders were completely aware that it implied a change in strategy,” says Mr. Savin. “They did not set any special targets and gave me the opportunity to propose the Company development strategy. It meant: movement towards a captive private equity fund.” Mr. Savin suggested that glorified in corporate battles Alfa Eco should be renamed into more neutral A1. “The company has a rich history<...> It can be treated differently. And few would argue that it reflected another era. Name with such a load was rather a minus than a plus.
Under Mr. Savin leadership A1 established a company to file and sale greenhouse gas emission allowance under the Kyoto Protocol – Alfa Carbon, a chain of grocery stories Belmarket in Belarus, United Golden Company and the airline Avianova, as well as purchased 100% of Kronverk Cinema Network in St. Petersburg, 50% of Independence auto dealer, and share in the IT-company Systematica. But in the crisis of 2008, the value of assets pledged to Alfa Bank dropped. And yet, according to A1 shareholders, in some moments the change of strategy was justified.
“Shareholders also viewed A1 as a strategic business incubator for the group,” said Mr. Savin. "It was agreed that if we buy and develop a big business, it would be single out into a separate direction [as it once was with Perekrestok and VimpelCom]. With Mr. Savin the Company also managed to bring a big business (Rosvodokanal) into consortium. Late-2008, the shareholders proposed to withdraw it from A1 and generously rewarded the investment company for the asset. According to the Former Managing Director of A1 Egor Sirota, 30% of Rosvodokanal was left in A1 as a bonus. Shares were allocated between Managing Directors and Managers of the Investment Company. Then the consortium bought their shares of Rosvodokanal for money.
2009-2010, Top Manager
Prior to joining A1 Mr. Zemnitsky worked as a Senior Vice President at Altimo, and participated in the Company’s scandalous entrance to Kyrgyzstan (Bitel). Under his leadership A1 has got into management Alfa Distressed Assets (ADA), which gathered Alfa Bank’s pledges collected on loans in crisis. Mr. Zemnitsky left the Company for the sake of his own projects.
From 2010, Crisis Manager
In August 2010 when CEO of Alfa Capital Mikhail Khabarov was vacationing with friends in Italy, he received a phone call from Mikhail Fridman. It turned out that Mr. Friedman also was in Italy and wanted to have a talk. A few days later they met in Michelin restaurant near Milan (located in a real village with hens and cows). Fridman asked Khabarov: “Would you like to lead A1?” The offer was a surprise: “A private equity fund intersected with Alfa Capital Partners, and its strategy was not completely clear. Khabarov’s question of what’s required from the Company, Mr. Fridman answered: A1 activity is a business of special situations.
One of the first decisions Mr. Khabarov made when started working in A1 in 2010 was the termination of the project Avianova. He could not get the Carrier’s reporting within 2 months, and suspected that something was going wrong in the company. “I have my own team of auditors. In December I called them informing that that evening they were to depart to Avianova and in a couple of days I wanted to know what was going on there,” says Mr. Khabarov. “Two days later they came and said: Statements are not prepared systematically, and sometimes they are hidden, losses for the year are expected to be $20 mln. more than planned. Capital call in January. If we do not contribute money, the company will be stopped. In January 2011 A1 contributed money provided for in the agreement with the other shareholder of the Airlines — American Foundation Indigo. According to Mr. Khabarov, in April it was necessary to contribute money again, but the situation did not change in the Airline Company, and a partner (he said) did not want to share the financial risks. A1 decided to get rid of further investment to the project, but allowed the Airline Company to work in summertime. Foreign management headed by Andrew Pine was dismissed from control, and replaced by Konstantin Teterin, former CEO of Airline Red Wings belonging to the banker Alexander Lebedev October 2011 Avianova stopped flying activity, and returned the money to 95% of clients, which took about $10 million of A1 funds. “By the way, it was an example for all others who want to put us in a desperate situation and say: Give us money, otherwise we would go bankrupt,” — says Mr. Khabarov with finality. “Of course it’s unpleasant situation, but when you manage dozens of projects, one of them can go bankrupt. For us it was better than to waste tens of millions.”
Under Mr. Khabarov’s leadership, the Company completed ADA project and began returning into the business of special situations, as the Company's shareholders would like. And yet, President of A1 says that apart from this the Company still faces the task to create something like VimpelCom or X5 for the Consortium. Here are criteria: the market should be calculated in billions of dollars, and on that market the player should rank at least second or third, if not come first. Still A1 does not have such under its belt.
Mikhail Khabarov, President of A1
President of A1 Mikhail Khabarov says, that if you enter into a corporate battle, make sure you win, otherwise it will be a blow to your reputation. He told Vedomosti in his interview how the investment company decides what battle is to enter, and what is better to give up.
A1 again becomes an active participant of corporate conflicts. Under leadership of Gleb Fetisov, Alfa-Eco became famous taking part in special situations. What has changed in this market since?
Disputes are becoming larger and longer. Now it takes you a year and a half to do something that earlier could take you from 3 to 6 months. Disputes are settled in terms of international law, as a significant part of Russian businesses belongs to foreign companies (offshore companies), and it takes you longer to resolve international disputes. Moreover, lawyers are becoming more qualified, and legal framework is improving. This indicates a change in the business environment, which has become more professional and technological.
In August A1 announced the purchase of 29.17% shares of the Moscow Tyre Plant, which is under insolvency process. Before that there were companies that owned land in the Sofia Embankment, the enterprise SPLAV, etc. What was the logic of all these acquisitions?
A1 buys undervalued assets from owners that cannot get their fair value due to risks and conflicts in respect of these assets. We come and remove the risks, after that the asset will get its fair value. For example, there is a company with two shareholders — one has 70%, and the other – 30%. The owner of minority interest has decided to sell its business. Controlling shareholder says: “OK, but it costs $2.” Minority shareholder answers: “What do you mean by $2? It costs $100!” And as the Minority shareholder does not know how participate in corporate wars, he begins to look for professional company that can protect his interests. He comes to A1 and asks: “Can you get a fair assessment of my package?’ Assessing the legality of the situation we answer: “Yes, we can act as “a white knight” and buy or help you to sell the fair value of the asset.”
-“In what way?”
-“We do it by protecting minority shareholders' rights under “the Company Law “, “Bankruptcy Law” both in Russian and international jurisdictions; by entering into a collective executive body, and obstructing transfer assets and money out of the company. We are experts in such an activity, engaged in it daily, and our response is instant, because we know what to look for and what to do first and foremost in order to protect the asset. But this requires a strong legal position of those from whom we buy assets. Russia is like Byzantium requires victories in battles. Any step back from maintaining position will be at once deemed as a sign of weakness. It is important to assess risks thoroughly at the input, and you must win, if have already joined the project, otherwise the reputation of hard and dedicated company will be lost. A1 is a strong structure: It will never depart from the path, if it’s engaged in a fight.”
-“How do you assess the strength of the seller's legal position?"
-“We check whether he is a real owner and his ability to defend his interest. Corporate relations are often very complicated and cause a lot of problems to persons inexperienced in such disputes. A man may claim that owns stakes in several companies, including foreign ones, and that the Board of Directors are partially under his control. We ask him to provide documents and answer a number of questions. Sometimes it turns out that he has no control or any property over there. His assets have already been stolen, or maybe he has never been an owner. In principle, battle for his rights would be incorrect, or too long and with little chance of winning. We refuse to deal with cases having weak legal position.”
-“What else you are interested in, besides the legality of the situation?”
-“The scale of the project. A1 is an expensive company, and we cannot afford ourselves to deal with small cases. We can reasonably use all our resources, if an enterprise is large and its revenues amount to several hundred million dollars.”
-“And what about the context? Shareholders may ask you not to get involved in a conflict with serious and well-known businessmen whose resources are not less.”
-“If the legal position is strong, and the person is a real shareholder, we are ready to defend his interest in a dispute with any structure. Moreover, in the situation when we have already entered into the conflict and outlined our position, acquiring a stake in the asset. Our shareholders will be the first to say: Are there any rights? If yes, please, defend them. You must do it. Generally, we have no context.”
-“Do you invest own or borrowed funds into the projects?”
-“Alfa Group has enough resources to finance any project, if it believes that such project deserves this funding. However, if required we can borrow money, and, not necessary from Alfa Bank. The maximum capital leverage is approximately one to one, and we believe it is a normal structure allowing our stable existence.”
-“How many cases do you have to examine?”
-“A huge number of situations are falling within an area of discussion and viewing. They may amount to hundreds. There is a great demand for a “white knight”. Very few ideas reach the Investment Committee. A Manager who makes a draft for consideration should have very strong arguments in order the project to be launched.”
-“Does it mean that the company has a problem, if there is the news that A1 has bought such a company?”
-“It may be a corporate conflict or debts of the company, as well as any other risks that prevent from realizing fair value or normal operations of the asset. I have already described the basic scenario of a corporate conflict. Now let’s talk about debts. There is no case for us, if a company has debts that it can serve. Otherwise, if the company is unable to serve them, then we have a case. In this case the company’s power is moving from shares to debts. It is managed by its creditors. Most often, they are not always ready to manage the enterprise physically: bondholders, separate creditors, banks. They have to do something with these debts, and hence discounts appear, because, as a rule, in such cases they believe it would be better to get money here and now, rather than travel to a distant city to manage a real usually unknown business and get money some other day.”
-“Can you travel to a distant city to manage a real business?"
-“We can. We have a relatively small headcount – about one hundred of employees, but we use a base of professional people in outsourcing that can pack up quickly and go to any city. We can take the company under control, appoint professional management, make financial restructuring and build the system more properly. Then a very important point comes: whether we continue to manage the company or sell it. Most often, we sell it to strategic investors. But there is another option: The Group [Consortium Alfa Group] can be interested in the business. Then it takes the enterprise and develops it without A1.”
-“What kind of business may be interesting for Alfa Group?”
-“Potentially, the enterprise must be worth billions of dollars in order to become an independent business in Alfa Group. Rosvodokanal used to be in A1, and then became an independent business, because the sphere of housing and public utilities is huge. Therefore, the first criterion for the asset’s transition from A1 to Alfa Group is the industry’s potential, — preferably unlimited. The second: Enterprise should be a player number one, or at least number three, then, the business is more profitable. Now we have the cinema business [Kronverk and Formula Kino Networks] which will not be able to become an independent business in Alfa Group, because the whole movie screening market accounts for 1.2 billion. Even if you consolidate the whole market, the total revenue will be $1.2 billion.”
-“Why did you buy Formula Kino? Is it an undervalued asset?”
“Not quite. A1 had several turns of development. One of them was related to interesting projects just in the business of special situations. President of the Company (it was then called Alfa-Eco) was Gleb Fetisov. After he left the company, it turned to the direction of private equity fund. At that time, A1 acquired for its portfolio the Airline Avianova, Independence Group of Companies, Kronverk Cinema Network and so on. We bought Formula Kino Network within the project for development of Kronverk. Before the end of the year we plan to merge the two networks. This is a very good project, but for a classical private equity fund. A1 is neither such a fund nor a strategic investor, and at this stage of development we are coming back to the business of special situations. Here we have significant competitive advantages. So of course, we’ll ever get out of the movie business, as well as of any other asset we have, such as Belmarket, Independence, etc. But it will happen, when we are able to sell them at the fair value.”
-“By the way, they say that you were trying to sell the Independence Group of Companies. Why didn't you sell it?”
-“Yes, indeed, we have been negotiating on a partnership with major dealer holdings. But we estimated our share in the company at least of $200 million. So, while we are developing it. With our help, Independence has taken over Ural Company Autoland. Regional car sales business demonstrates significant growth. So, we are still there. But as soon as we reach a certain level, we will get out.
We are forming new projects portfolio in terms of special situations business. What is the difference of current A1 projects: we do not play the market. What does it mean to play the market? You buy stocks for $100, expecting market growth and thinking that they will cost $130, because something would happen that does not depend on you, but has a positive impact on the enterprise. Business of A1 is entirely different: we bought stocks for $100 and conducted a series of actions, as a result the cost increased to $200.”
-“And no more business from scratch?”
I strongly believe that we should not create a business from scratch. What does it mean to create a business from scratch? You create a foundation, attract $1 billion and allocate them to ten projects. You have two projects “in neutral”, two projects have fallen, and three projects rushed so much, that covered losses on the other projects. Moreover, in the process you receive the management fee for assets you have bought and manage. A1 has a completely different model: We get the money only when the business is sold with profit. We receive no payment for the process.”
-“What is the structure of the company?”
-“We have an investment unit, which employs six managing directors: five are in Russia, and one is in Ukraine. Each managing director has its own projects and mini-team. Cooperation between the teams is encouraged, as well as competition, especially competition for the Company’s resources. The teams are looking for the projects and implement them. Totally, the Investment Unit employs 50 people. In addition, there are support services that are very important to us: analysts, financiers, lawyers and security personnel. Managing Directors and Heads of Services are included into the Unified Investment Committee which approves all projects. I am the Chairman of this Committee. Managing Directors receive bonuses of 10% from the earnings on the project. There is a general motivation for members of the Investment Committee, based on the Company’s results. “
-“You have an Office in Ukraine. Does it mean that you are planning overseas projects?”
-“Any special situation means human relations, and to resolve it you need to understand the mentality of persons whom you are dealing with. Ukraine is close to us in terms of both mentality and legality. For this reason, we prefer to implement the business of special situations in both Russia and Ukraine. All other projects in other countries can be implemented within the business of strategic investments. And this is not entirely our field of activity.”
The right of Alfa
“We have never been involved in any corporate raiding, nor have taken other people's property. Though, there are some people who might have a grievance against us, and they are not few. But if we have legal and moral right (what is equally important), we are obliged to act. For us it is a matter of principle.”