Liquor store gold

The Bell

Hello! This week our top story is the planned record-breaking IPO of liquor store chain Red & White. We also look at the corporate conflict that engulfed a top confectionary company after the death of its founder, and the senior Communist Party official detained for poaching when police found a dismembered elk in his trunk.

Russia’s biggest liquor store chain aims at $13bln IPO valuation

Alcohol retailer Red & White announced Wednesday the details of its initial public offering (IPO) on the Moscow Exchange that is set to get underway next week. The company could be valued at up to $13 billion, less than originally anticipated, but that would still make it the largest placement in Russia this year.

  • Mercury Retail Group, which owns Red & White (as well as liquor store chain Bristol) said the indicative IPO price range was $6–6.50 per global depositary receipt (GDR). Based on this, Mercury expects to raise $1.2-1.3 billion for the sale of 10 percent of its shares in Red & White.
  • The liquor store empire controlled by Mercury is gigantic, and their branding is a familiar sight on Russian streets. In 2020, they operated an eye-watering 8,800 stores. Bristol and Red & White’s combined revenue in 2021, will amount to about 330 billion rubles ($4,6 billion), according to InfoLine. And their profits are twice those of Russia’s leading food retailers, according to Bloomberg’s sources,
  • Mercury’s plans to float Red & White were first reported by Reuters in late September. In mid-September, a source told Bloomberg the group was hoping to raise $20 billion. At the end of October, Kommersant newspaper’s sources were talking about up to $25 billion. That would have been the biggest IPO in Russia in the last decade.
  • There are three shareholders in Mercury Retail Group: secretive billionaire Igor Kesayev, his lifelong business partner Sergei Katsiyev (who was Kesayev’s tutor at Moscow State Institute of International Relations and then started out with him in the tobacco industry); and Red & White founder Sergei Studennikov.
  • Kesayev and Katsiyev made it big in the 1990s in tobacco: they became the Russian partners for several large, international tobacco companies when the government cancelled import duties on cigarettes (that had funded, among other organizations, the National Sports Foundation, the Russian Orthodox Church and associations for veterans of the Afghan War). Between 1996 and the mid-2000s, their companies — Mercury and Megapolis — became the monopoly wholesalers for tobacco giants Philip Morris and JTI, accounting for 70 percent of the Russian market. In 2006, revenues from Megapolis alone were $2.7 billion – more than any other Russian retailer at the time. By 2012, they had risen to $12 billion.
  • Kesayev invested his money in several different projects: he spent $1 billion on the Mercury skyscraper in Moscow; purchased a famous Soviet-era arms factory; and tried to buy assets in the oil industry. Then, he moved into retail, buying a controlling stake in budget grocery chain Diksi in 2007 for $600 million, and spending almost $1 billion on Viktoria retail group four years later. However, he struggled to compete with market leaders Magnit and X5 Retail Group.
  • When Kesayev and Katsiyev decided to set up a liquor store chain called Bristol, they first looked closely at Red & White, which was already known as a successful market player. One of Katsiyev’s acquaintances told The Bell that the businessmen even offered to buy the chain from founder Studennikov, but he “abruptly rejected them”.
  • Kesayev and Katsiyev eventually got Red & White, but after the Federal Tax Agency and security service officers carried out a series of raids on Red & White’s offices and warehouses in 2019. None of The Bell’s sources were in any doubt that the sale to Kesayev and Katsiyev was connected with the investigation. But nobody could say with certainty that the buyers had put the squeeze on Red & White. Studennikov received 49 percent of the new, combined business, while Kesayev and Katsiyev took a majority stake of 51 percent.
  • Mercury Retail Group disposed of its most troublesome asset earlier this year when it sold Diksi — Kesayev’s first retail business — to market leader Magnit for 93 billion rubles ($1.2 billion).

Why the world should care

The Russian stock market is booming. Some of the biggest IPOs in recent years include online marketplace Ozon in 2020 (valuing the company at $6.2 billion), and low-cost retail chain Fix Price in March ($8.3 billion). But investors who went for these assets might be disappointed. FixPrice shares have fallen 14 percent since its IPO, while Ozon shares have risen just 11 percent since it floated — three times less than the Moscow Exchange Index over the same period.


Alfa Group circles amid conflict over ‘syrki’ confectionery empire

The death of businessman Boris Alexandrov last year triggered a battle for control of his confectionery company, Rostagrokompleks. Alexandrov’s former partner, Yuri Izachik, finally went public Tuesday with his version of how the corporate conflict over Rostagrokompleks has unfolded. Izachik, who currently lives in Kansas, was put on an international wanted list last month in connection with the dispute.

  • Shortly before his death, Alexandrov transferred the rights to the group’s two key trademarks — Rostagroexport and B.Y.Alexandrov — to his daughter, Yekaterina. However, Izachik held 100 percent of the shares in Rostagrokompleks, which is Rostagroexport’s main operating company, and the owner of the B.Y.Alexandrov cheese factory. After Alexandrov’s death, Izachik transferred 85 percent of his shares to five senior managers in the company.
  • The bedrock of the confectionery empire at stake is the manufacture of chocolate coated curd snacks — ‘syrki’ in Russian — an iconic Soviet product that was one of the few widely available sweet treats under Communism, and a staple of school dinners and kindergarten lunches.
  • Izachik’s decision to transfer 85 percent of his shares was in line with Alexandrov’s wishes, according to a source who has followed the conflict. Alexandrov apparently said that “all the company’s assets should be consolidated and divided among key managers and heirs after his death.” That’s what Izachik was doing: after his distribution of shares, each of the five top managers would have had 17 percent of the assets.
  • However, Izachik unexpectedly went to court last month to demand this agreement be torn up and the dispersal of 85 percent of Rostagrokompleks rendered invalid. At about the same time, it emerged that A1, the investment division of Alfa Group, owned by billionaires Mikhail Fridman, German Khan and Alexei Kuzmichev, had entered the fray, and was offering to buy out all the co-owners of Rostagrokompleks. Some speculated that A1 is looking to gradually consolidate the business, and then sell it on to a strategic investor.
  • Izachik, who currently lives in the U.S. state of Kansas, broke his silence Tuesday in an interview to Forbes magazine. He told the reporter that he gave senior management 85 percent of Rostagrokompleks in the expectation that 15 percent of all the brand’s companies would come to him. “I gave them 85 percent of my 100 percent but they didn’t keep their promises: their share in the other companies remained with them,” he said.
  • Asked about the timing of his lawsuit to contest the share handover, Izachik said that it was filed before A1 got involved. Izachik believes A1’s offer to be reasonable — paying him, five senior managers and four of Alexandrov’s heirs $5 million each for the whole business. He said he is willing to “discuss and negotiate”, but pointed out that there is no agreement yet. Izachik’s lawyer Svetlana Maltseva told The Bell that her client decided to give up 85 percent of the shares in Rostagrokompleks at a time when he was depressed and the financial condition of the company was described to him as ‘terrible’.
  • The criminal case against Izachik (as a result of which his name was added to an international wanted list) was based on a claim filed with police by the senior managers with whom he is in conflict. The managers maintain Izachik is trying to force them to invalidate the original share handover.
  • Izachik has no plans to return to Russia. According to his lawyer, his age and health makes flying inadvisable during the pandemic. “One need only recall that… Boris Alexandrov died of coronavirus after flying to Russia,” Maltseva said.

 Why the world should care

In Russia, it’s almost inevitable that the death of the charismatic founder of a successful company will lead to a bitter corporate conflict. A similar legacy battle over the fate of cosmetics company Natura Siberica has been underway for almost a year.


Top Communist detained after dismembered elk found in trunk

Senior Communist Party official Valery Rashkin could face up to two years in jail for illegal hunting after being detained last month with the carcass of an elk in the trunk of his car. Rashkin, a long-serving deputy in the Russian parliament and the last bastion of Kremlin opposition within the Communist Party, said he was set-up.

  • Police were reportedly alerted 29 October to reports of shots fired in Saratov Region (about 560 miles from Moscow). Rashkin was subsequently found in a car near the scene and a police search of the vehicle turned up fragments of an elk carcass, as well as an ax and two knives with traces of blood.
  • According to police, Rashkin said he and his colleagues had found the carcass of the elk and decided to butcher it. Police also said that Rashkin refused an alcohol screening test, which could result in a fine of up to 500,000 rubles ($7,000). A source told state news agency TASS that Rashkin was drunk. Shortly after, the police opened a criminal case that could lead to poaching charges.
  • Two cases of hunting weapons were reportedly found not far from where the elk carcass was butchered. One of them had a hunting rifle with a night vision scope and the other held a tripod and cartridges, plus a hunting permit and a firearm license in Rashkin’s name.
  • Under Russian law, transporting hunted game without a permit is not permitted — and there was no quota for elk hunting in the place where Rashkin was found. The head of a nearby hunting lodge told reporters that this was not the first time Rashkin and his friends were involved in poaching.
  • Rashkin later told TV channel RTVi that the whole incident had been misconstrued, and was a deliberate attempt to smear him. “I was visiting my friends and went for a walk in the woods on my own. I know the place well, it was dusk. I saw a car leaving, lights flashing. I headed to that spot and found the elk,” he said. Then, he apparently went back to the house and roused one of his friends. Together, they loaded up the dead elk and the two of them were in the process of taking it to the police when “a whole horde of FSB officers, police and environmental officers descended on us.” Rashkin denied killing the animal, insisted he was sober during the incident, and said he refused an alcohol screening test for fear it would be falsified.
  • Presidential press secretary Dmitry Peskov was restrained in his comments on the incident. Peskov said it wasn’t the Kremlin’s job to draw conclusions; that was the job of the State Duma’s ethics committee and Rashkin himself.
  • As a deputy in the State Duma, Rashkin has immunity from prosecution and cannot be charged without parliament’s approval. To obtain this permission, the prosecutor general must present his case to the speaker. State Duma speaker Vyacheslav Volodin said parliament would consider stripping Rashkin of immunity if it was asked to take such a step by the prosecutor general.
  • Rashkin has been a deputy since 1999. He is also leader of the Moscow city branch of the Communist Party, known for his strident criticism of the authorities (often more strident than those of the Communist Party leadership). While the Communist Party today is somewhat a toy party that is in fact managed by the Kremlin, Rashkin represents the protest movement within it. He has publicly supported jailed opposition leader Alexei Navalny, against the party line, and is usually the one to organise the party’s mass protests. Recently, Rashkin joined a coalition of deputies to call for the cancellation of online voting in September’s parliamentary elections. When Zuganov, who has been the Communist Party’s leader since 1993, steps away, Rashkin might be the one to take his place.

Why the world should care

This is far from the first illegal hunting scandal involving high-ranking Russian officials. And history suggests that, despite very strict penalties for poaching, these officials usually escape serious punishment.

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