Streetwise Professor

May 27, 2012

Home Court Advantage

Filed under: Economics,Politics,Russia — The Professor @ 12:21 pm

The truce in Telenor’s Kafkaesque legal battles in Russian courts over Vimpelcom is apparently over.  You may recall that a small shareholder, Fairmax, a stalking horse for Mikhail Fridman’s Alpha Group owned by his brother, sued Telenor for $1.7 billion in Tyumen (though some accounts put the figure as high as $5.1 billion), claiming that the Norwegian telecom firm had harmed Vimpelcom by refusing to go along with a deal to purchase Ukrainian operator URS.  This followed a series of lawsuits filed against Telenor by Alpha and related entities.  Eventually this resulted in a settlement between Alpha and Telenor in which the companies set up a new joint holding company, in which the two entities would each large shares representing 25 percent of the voting rights.

That October, 2009 deal brought some relative peace, but that is now over.  In February, 2012, Telenor acquired the VimpelCom, LTD stake held by Egyptian Naguib Sawiris, which gave it a 36.36 percent of the voting shares (up from 25.01 percent) and simultaneously ceased its arbitration action against Fridman’s Altimo companies (which held 25 percent).

Two months later, the Russian Anti-Monopoly Service swung into action, filing a suit claiming that the Telenor-Sawiris deal violated Russia’s laws regarding foreign ownership. In response, a Russian court blocked VimpelCom LTD from paying dividends, and enjoined the company from implementing actions approved at its Annual General Meeting last week.  Earlier the court had blocked Telenor from voting its and Sawiris’s shares to change the composition of the board.

In response to the court actions, VimpelCom LTD’s ADRs fell over 16 percent.

This all clearly benefits Fridman by stymying Telenor in its attempt to increase its control over VimpelCom.  The Telenor-Sawiris deal outflanked him, but he had another card-or court-up his sleeve, and that card is likely a trump.

What a surprise.

This should be a warning to anyone contemplating large investments in “privatized” Russian companies.  The means of expropriation are many.  Russian interests have home court advantage-quite literally-and as a result of this advantage, can deprive foreign investors of the benefits of their investments (cash flows and control rights).

Any wonder why Russian companies sell at large discounts?  Like I said last week, Russia won’t get first world prices playing by third world rules.  But Putin et al can’t help themselves.

If you still have your doubts, I have some wonderful investment opportunities for you.  I will treat you better than a Russian court.  Promise!

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1 Comment »

  1. I guess I have a stupid question. Do Western companies sue their partners for NOT doing deals? I don’t understand the URS-related lawsuit. Perhaps that’s your whole point, but feel free to educate me more.

    Second, it amuses me that Fridman and his rivals continuously war over practically the same assets since that’s all they have. It’s also quite amusing that Fridman has an uncanny knack for winning most of those battles.

    Comment by Howard Roark — May 27, 2012 @ 11:39 pm

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