Big plant on sale block for small price

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April 2, 2010, 1:19 a.m. | Business — by John Marone

Luhanskteplovoz, a state-owned locomotive manufacturer, has been at the center of privatization scandals in recent years. The government said the plant will be auctioned again at a starting price of $50 million (Ukrinform)

One bellwether of a government’s transparency, accountability and commitment to end corruption is how it sells off state assets. So far the team of new Prime Minister Mykola Azarov looks like it’s off to a bad start with respect to privatization sales. Luhanskteplovoz, a lucrative state-owned locomotive maker, has once again been put on the auction block by the government. But the starting price of $50 million for a 76 percent stake is at least $75 million less than the prized asset’s market value, raising concerns. The cash-strapped Ukrainian state needs all the money it can get and, if Luhanskteplovoz is underpriced, its sale will cast a shadow on the fate of other valuable assets awaiting privatization.

To make matters worse, some fear that the plant, which in the past has drawn interest from the likes of German electronics giant Siemens, has become a sweetener in the new cabinet’s ongoing gas negotiations with the Kremlin. Businessmen in Russia are also interested in Luhanskteplovoz.

Azarov and his patron, President Viktor Yanukovych, have assured Western investors that they are ready to support an open market economy and root out corrupt practices. The need to win international financing, public and private, to help revive Ukraine’s damaged floundering economy is seen as a powerful driving force for these government promises.

But the possible return of shady privatization practices raises alarming questions, namely: Is the Yanukovych-Azarov team merely dusting off the playbook of the crooked 1990s by telling outsiders everything will be on the up-and-up, while in reality they will do whatever their ruling Party of Regions wants to do with state money and assets?

The Luhanskteplovoz development recalls the infamous days of their former patron, ex-President Leonid Kuchma, when billions of dollars worth of state gems were sold for a pittance to well-connected oligarchs. Many think they now have a strong hold of the government as well as the economy. There was hardly a transparent or competitive transfer of the nation’s most valuable assets to private hands during Kuchma’s decade-long rule.

“It looks like they are stepping on the same rake,” Andriy Kozhemyakin, a privatization watchdog and lawmaker in the opposition faction of former Prime Minister Yulia Tymoshenko, said.

Privatization watchdog and parliamentarian Andriy Kozhemyakin

Luhanskteplovoz was first privatized in March 2007, when Yanukovych was still premier. Although analysts at the time valued the asset at as much as $200 million, it was sold in a last-minute auction that included, essentially, one bidder from Russia for $58 million.

Later, after replacing Yanukovych as the head of government, Tymoshenko had the controversial privatization of Luhanskteplovoz overturned and its shares put back under state control.

Now Yanukovych has returned to power, only this time as president and Luhanskteplovoz is again up for sale. And the price: $50 million.
“This looks a repeat of 2007,” Kozhemyakin said. Back then, other potential buyers were effectively eliminated from bidding by tender conditions tailored to Russia’s Transmashholding.

Although most analysts agree that Transmashholding, as a customer of the Ukrainian locomotive maker, makes for a good buyer, the starting price set by the Ukrainian government is once again surprisingly low.

Ivan Kharchuk, senior analyst of Troika Dialog Ukraine investment company, said a fair price for the asset would be $150 million to $250 million.
Alexander Pochkun, managing partner at the law firm Baker Tilly Ukraine, said a starting auction price should be at least equal to the stake’s market capitalization – or what the stock market values it at (currently around $127 million in the case of Luhanskteplovoz).

“Anything paid by the bidders above the market capitalization is a premium, which reflects how much each bidder individually values the asset,” he said.
So why would the Azarov government, which is faced with the daunting task of reviving an economy that last year witnessed a 15 percent drop in gross domestic product, want to get less instead of more for state assets?

One possible reason could be that the Yanukovych-Azarov Regions Party, which controls parliament, is chock full of eastern industrialists who are primarily concerned with lower prices for the gas they import from Russia.

Azarov and Ukrainian Energy Minister Yury Boyko were in Moscow only last week to negotiate lower gas prices. Neither has clearly explained what Ukraine is prepared to offer Moscow in return.

“I wouldn’t be surprised if this were related to ongoing gas talks. In that case, we can probably expect more of the same down the road,” Kozhemyakhin said.

When Tymoshenko took over the government in 2005, in the wake of Ukraine’s much touted Orange Revolution, she tried to reverse such deals.
The best example of her success was the resale of the nation’s largest steel mill, Kryviy Rih, to Mittal (now ArcelorMittal) for a record-breaking $4.8 billion.

Kryvorizhstal had been originally sold by the state to companies controlled by two of Ukraine’s richest men, Viktor Pinchuk (Kuchma’s son-in-law) and Rinat Akhmetov (also a member of Yanukovych and Azarov’s Regions Party faction) for only $800 million.

A view of Odesa Portside Plant, a state-owned chemical plant put up for sale last year. After it failed to fetch a good price, the privatization deal was canceled by the government. (PHL)

The danger is that other prized state assets -- such as the Odessa Portside Plant, a chemical plant, and Ukrtelecom, the telecommunications monopoly – will be sold off in under-handed ways And with Yanukovych in control of the presidency, the parliament and the government, he can conduct privatizations pretty much the way he wants.

The sale of the Odessa Portside Plant, for example, was opposed by former President Viktor Yushchenko but favored by Tymoshenko when they were in power.

In the end, despite great efforts to get the best price for the asset ($1 billion) – including another nationally televised auction – Tymoshenko ended up cancelling the sale due to what she said was collusion between the bidders.

Ukrtelecom is also a state monopoly being eyed by Western investors with deep pockets, and is also on Ukraine’s privatization list, where it has been for a long time.

New privatization chief Oleksandr Ryabchenko announced last month that the state would sell a 67 percent stake in the asset for nearly Hr 700 million later this year.

The state telecommunications giant Ukrtelecom has been on the privatization list for a long time, but its sale is yet to be scheduled. (UNIAN)

Ironically, Ryabchenko was among those who criticized the first attempt to privatize Lukhanskteplovoz as well as the numerous other controversial state auctions that preceded it under Kuchma.

But Ryabchenko is not talking now, at least to the Kyiv Post for this article. Attempts to reach him were unsuccessful this week.

Kyiv Post staff writer John Marone can be reached at
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Anonymous April 2, 2010, 8:55 a.m.    

PwC Ukraine has cameras and sound devices in its offices which it use to spy on staff thus breaking the law on the use of electronic devices. Such devices are monitored by the partners in remote locations. PwC Ukraine has also a patriarchal attitude towards female staff, view them as their chattels that should not have a private life and to spend their youth and week ends to be at the disposal of the Partners.

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Anonymous April 2, 2010, 11:26 a.m.    

so quit then.. sure they can find a replacement willing to work under those conditions..

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Anonymous April 2, 2010, 10:44 p.m.    

Shame on PwC and whoever made the last comment. International companies, like PwC, should not only say rethoric of company values but also live them. And this is not the case with this company.

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Anonymous April 3, 2010, 12:18 a.m.    

Latest commentary on PwC on the B4 blog and the shameful silance of PwC on the accusations, including requests from press for comments, is not the way forward. If companies like PwC act like this what can we expect from Ukrainian businesses? International business does not have the moral right now to educate Ukrainians with its mentoring tone after such dealings with PwC.

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Anonymous April 3, 2010, 1:59 p.m.    

Is not putting surveillance cameras a standard practice for Ukraine? I see them quite often in offices and very strict security measures, which is a reflection of the security risk in this country.

I am not quite sure how legal it is to put on cameras as everything is licensed in Ukraine but I would presume PwC has all the necessary permissions.

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Anonymous April 2, 2010, 9:45 a.m.    

This is one of the many things IMF should consider when they ask for conditions to any potential loans for Ukraine in the future.

It could also ask for conditions binding the government and president up to market pricing of assets up for privatization auctions in the future.

This would make it impossible for Ukraine authorities to by-pass any market oriented auctions.

It should have worked that into existing tranchs given to Ukraine, but unfortunately IMF has ben to weak or not dared to challenge Ukraine on this issue.

Unless foreign investors are given equal rights in auctions, and given a fair chance to bid on the assets, gives no interest for the international society to support Ukraine in its further development.

If Ukraine deem Russian interests more attractive, then Ukraine has to rely on Russian support in any form in the future.

EU counties, EU, EBRD, IMF and charities should retract their support to Ukraine with immediate effect to demonstrate that Ukraine either play by internationa rules, or the consequences are dramatic and should leave Ukraine with its Eastern European partner(s).

But it is scary to see that the Ukraine people really want the old Kuchma times back, and get this in their faces - even if they knew this would happen.

We have given Yanu and his team players enough time to demonstrate their actions and how they want to rule Ukraine.

Too many times have they demonstrated that they want to play the parties against each other and play on the wounded Ukraine that needs help to be a partner in the future.

EU on one side, Russia on the other side, and neither will be happy with what they see happen in Ukraine. Ukraine will loose the trust of both and left alone - nothing the Ukraine people deserve - however again - they chose this path by the elections in 2010.

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Anonymous April 2, 2010, 11:33 a.m.    

What is this prized assets market value, the article does not say?

How is it a prized asset when the KP ran an article only last week stating the rail monopoly in Ukraine is losing money?

The article states the starting price is $50 million and not that it is a set price.

If there are two bidders (or more) then $50 million will certainly be exceeded but the bidders will need to do due diligence.

Due diligence will reveal the true value of this company and not John Marone of the Kyiv Post.

If the Kyiv Post has done due diligence on the company and valued it at more than $50 million then the Kyiv Post can state it is being undervalued.

Of course the KP will not have done so as such due diligence is always subject to NCND in Ukraine.

This asset is worth only what due diligence states and what someone will pay for it. It is not worth one cent more than someone will pay for it.

Simple business facts which escape Mr Malone.

What value does the KP put on this asset and how did they reach it without due diligence?

This article sucks

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Anonymous April 2, 2010, 4:06 p.m.    

The article atates the stock market values is at around $127 million. You seem to think things have changed for the better in th Party of Regions, I hope you are willing to admit they are not if the factory will be soled well below $127 million...

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Anonymous April 3, 2010, 12:25 p.m.    

Stock market value is not the same as the value which due diligence will put it at. Do you not recall the stockmarket over inflating things so much the world economy crashed?

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Anonymous April 3, 2010, 12:27 p.m.    

Very true, the principle is similar to nominal GDP and real GDP.

I agree without having done due diligence then there is no way any commentator can give a realistic price.

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Anonymous April 5, 2010, 10:19 p.m.    

1st. People who value never ever actually buy from their own pocket! 2nd. Agree, something is only worth what one is willing to pay for it.

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Anonymous April 3, 2010, 12:28 p.m.    

So, once again the few in government will do what is needed to line there pockets and scratch their good ole boy buddies on the back while the rest of the country continues to suffer from the effects of no money for things the people really need.

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