After numerous rumours, and several on/off attempts (nefarious and otherwise) over the years, Odessa Port Side – an asset actually worth having under the right management and with the right business plan – goes up for privatisation on 26th July at 1100 hours.
It is a major test for the Ukrainian authorities.
It is the first privatisation of a major Ukrainian State asset since the “Revolution of Dignity” and it is one that international investors, whether they are interested in Odessa Port Side (OPS) and ammonia production or not, will have a keen eye upon.
A privatisation that meets best international standards it has to be, for a continuance of perceived nefarious and grubby insider dealing will radically and almost immediately reduce any international interest further State asset privatisation.
In short all those that have entered the process, whether they emerge as owners or failed bidders, must come away confident that the playing field was level and that there was no bias against them as far as the decisions made are concerned.
Applying the Chatham House Rule following a conversation today, and naming no names to insure no breach of any existing NDA’s that may or may not be part of the bidding process, as of the date of this entry it is true to say that there are several foreign companies interested in the asset, notwithstanding several domestic bidders too.
As is standard with the privatisation of State assets, within the sale terms there are obligations for any new owner of the 99.5% shares for sale.
Before mentioning a few of those (numerous) terms, there is first the issue of the opening bid price – $527 million.
Is Odessa Port Side worth that?
To be honest, probably not when later considering the contractual obligations any buyer will have – and perhaps more importantly whether that price includes or excludes debts owed to Dmitry Firtash over historically disputed gas supplies.
(In 2014 immediately following the “Revolution of Dignity” Odessa Port Side switched gas suppliers from Mr Firtash’s РГК Трейдинга to a European supplier, OPS no longer being tied to the Yanukovych Regime system. Mr Firtash’s РГК Трейдинга immediately submitted a claim for $1.39 billion against Odessa Port Side relating to unpaid gas bills between April and June, at the Odessa Regional Economic Court. The actual debt for gas claimed is $1.237 billion in relation to 217 million cubic meters of gas. The remainder of the claim relating to to penalties incurred. OPS robustly disputes the claim.)
Does any buyer inherit any potential Firtash debt, or is that debt contractually ring fenced in the bidding, or is the price in some way taking into account that potential debt? How long before court decisions over the alleged debt, and how far can any appeal process go by either side?
It is a known unknown from any due diligence carried out by potential buyers.
Further Odessa Port Side, whilst clearly capable of turning a profit even under below par management and with a desperate need for moderisation (rather than continued maintenance costs on an aged industrial complex) any buyer will have to dramatically upgrade the industrial asset they purchase – not just because the current industrial complex is far from being technologically cutting edge and therefore inefficient, but also because there is an obligation within the purchase contract to upgrade the plant within 5 years (that 5 year period commencing 1st April 2017).
There are also obligations to increase wages (not lower than inflation), take into account an environmental audit carried out in 2015 when modernising the industrial plant, obligations to avoid market monopoly, to plan for Yushni development, a guarantee that the site will continue its core business (albeit development is encouraged in other chemical pursuits), and the transfer of 2015 – 16 dividends prior to the asset sale must also occur.
All things considered, a serious and legitimate foreign investor that would honour contractual obligations the to letter would probably see $527 million as the top end of any bidding rather than the opening bid. The domestic interest would perhaps see it differently simply because they may feel fairly sure of findings ways of delay, defer, mitigate or nullify many of the sale obligations once it is complete.
Clearly a foreign and recongised buyer would send all the right signals to the international corporate community – and to be frank even if the asset was sold for $400 million (a value this blog would assign to OPS) to such an international corporation, $billions (rather than the $hundreds of millions asked for) would probably head to Ukraine as a result.
The problem with that, aside for a clear bias to a foreign investor, is one of public perception. There will be those in the Ukrainian constituency that consider $527 million cheap for OPS (perhaps as a matter belief in some mythical worth rather than based upon economic reality).
Likewise there will be perceptual issues within the Ukrainian constituency if Odessa Port Side is sold to a domestic buyer when there is known foreign interest. Even if the process is deemed fair by all participants, the public perception will be of the oligarchy nefariously buying up more assets – (even if they actually did so entirely fairly for once).
How to mitigate such a perception in the likelihood of a domestic bidder out-bidding a foreign corporation?
Perhaps one or more of the domestic bidders has made pre-bid arrangements with an external partner like the EBRD? Perhaps not. Such agreements would perhaps instill some governmental confidence in the adherence to any and all buyers obligations, and also among the Ukrainian constituency.
That said, bids to buy Odessa Port Side (or any following privatisations) should not be judged upon best $ offer on the day alone – the ability (preferably proven) to fulfill all contractual obligations of purchase is a major consideration too.
Whilst this blog would think it wise to see OPS go into foreign corporate ownership simply to actively encourage more foreign bids for other assets subject to privatisation, whoever ends up owning Odessa Port Side (be they foreign or domestic) is going to be far less important than the privatisation process being seen as fully and unambiguously meeting best international practice.
Whatever the outcome of 26th July, investor confidence (regardless of nationality and/or participation or observation) in the integrity of the process is what matters the most for Ukraine. The State cannot afford to get this wrong by way of process, or be seen to allow buyers obligations to melt away during the subsequent 5 years.
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