The sale of a large portion of the Russian state's interests in a diverse group of its most successful companies is expected to occur within the next one to three years. This highly anticipated new phase of privatizations in Russia should provide significant opportunities for Russian and foreign investors alike.
However, enticing foreign investors to participate may require a more buyer-friendly process than the Russian government might like.
The recently adopted Russian privatization program specifies the companies and assets that are due to be privatized before the end of 2013. Among those on the list are OAO Rosneft (the largest Russian oil company, with a market capitalization of approximately $85 billion), JSC RusHydro (one of the leading hydropower generating companies, with a market capitalization of approximately $15 billion) and Sberbank (the largest Russian commercial bank, with a market capitalization of approximately $80 billion).
For the first time, the Russian government has invited Russian and international investment banks to participate in the privatization process as its advisers. Among those officially chosen by the Russian government are Credit Suisse Group, VTB Capital, Deutsche Bank AG, VEB Capital, Merrill Lynch LLC, Morgan Stanley, J.P. Morgan Chase & Co. and Goldman, Sachs & Co. It is expected that the involvement of investment banks, especially internationally recognized banks, will increase the transparency of the privatization process and make participation more attractive to foreign investors.
Most assets are expected to be sold in public auctions; however, in order to make the privatization process more flexible and investor-friendly, the government may consider other methods as well.
Regardless of the privatization method, investors should keep in mind that the government sale procedures do not typically allow for any meaningful negotiation of the terms of the transaction, and the handling of due diligence may seem unusual to those more accustomed to sales in the private sector (for example, the state may organize a due diligence data room to provide access to documents, but it is not required to do so). Moreover, the acquisition agreements are usually short, simple documents governed by Russian law and are unlikely to include any representations, warranties, indemnities or other protections that would be anticipated by a foreign investor.
There is some hope, though, that the government will be a bit more flexible in at least certain transactions. For example, in the sale of a stake in VTB Bank (one of the leading Russian banks, with a market capitalization of approximately $30 billion), which was the first company privatized under the new privatization program, there was some indication that the government recognized the importance of making the process attractive to foreign investors. The first potential investor to confirm its interest was TPG Capital, and in light of the benefits that the participation of a sophisticated investor like TPG could have, the Russian government initially considered a more buyer-friendly sale process, which would have allowed TPG to acquire the stake in VTB Bank under a share purchase agreement governed by English law without any auction.
However, after TPG conducted its due diligence, the Russian government was reportedly advised that TPG was having trouble getting commitments from a sufficient number of co-investors. As a result, the negotiated transaction with a single buying group was abandoned in favor of a public offering. With the help of Merrill Lynch, Deutsche Bank and VTB Capital, the Russian government managed to sell global depositary receipts representing 10% of VTB shares for a total of $3.26 billion.
All in all, the Russian government is planning to raise approximately $60 billion through the privatization initiative, creating a huge opportunity for foreign investors. And the sale of the VTB stake has illustrated that the government may be willing to structure a transaction to be more appealing to such investors. In any event, dealing with the Russian government and the more structured privatization process is likely to be a bit trickier than a typical M&A transaction. Close consultation with sophisticated advisers on the ground in Russia is therefore crucial to navigating these waters successfully.
Alyona N. Kucher is a partner and Ekaterina A. Raykevich is an associate in the Moscow office of Debevoise & Plimpton LLP. A version of this article originally appeared in the winter issue of the Debevoise & Plimpton Private Equity Report.