Last updated: April 5, 2013 10:58 pm

Cash-laden oligarchs hunt pastures new

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View of the office of the TNK-BP Russia's third-largest oil producer, in Moscow, Russia©EPA

Hours after Rosneft finalised a deal to buy out the oligarch founders of rival oil producer TNK-BP last month, Mikhail Fridman and German Khan donned white robes, safari hats and sunglasses and began a three-day trek in the Israeli desert.

Flanked by a dozen other tycoons, two camels and a film crew from a Russian television channel, the pugnacious Mr Fridman was shown taking naps in the shade, learning to make flatbread from scratch, and belting out Ukrainian folk songs for his travel mates across the camp fire.

Why Mr Fridman decided to have the film crew accompany him on this particular pilgrimage, his third such trip, will remain a mystery. Ten minutes of footage was later aired on Russia’s opposition-leaning station, TV Rain. But one thing from the tape is clear: Mr Fridman was in high spirits.

“Some people after they do the deal of their lifetime, they go to the banya and call some girls, some guys go into the desert and sing Ukrainian folk songs,” says Steven Dashevsky, founder of Dashevsky & Partners, a Moscow investment company.

“The guy is in a good mood and it’s very easy to understand why he’s in a good mood.”

After selling their half of TNK-BP to Rosneft last month, Mr Fridman, Mr Khan and their two partners Viktor Vekselberg and Len Blavatnik, are $28bn richer.

Now they are embarking on new phases of their careers, nearly a decade after they joined forces with BP to create one of Russia’s largest private oil majors.

While some market participants have questioned whether AAR – the four oligarchs’ consortium – was able to keep the entire $28bn, people close to the consortium insist that the oligarchs are able to.

For two of the tycoons the deal marks the end of an era. Mr Vekselberg and Mr Blavatnik had been anxious to end their involvement in TNK-BP months before the deal with Rosneft was sealed, people close to the billionaires say.

Mr Blavatnik, who lives in London, has moved on from oil and gas to the music business, a likely investment target for some of the $7bn he has received from the sale.

Some people after they do the deal of their lifetime, they go to the banya and call some girls, some guys go into the desert and sing Ukrainian folk songs

- Steven Dashevsky, founder of Moscow investment company Dashevsky & Partners

Mr Vekselberg, meanwhile, has switched his main focus to the power sector. He declared on Russian television on Thursday that up to $1.5bn of the $7bn he has received from the deal will go to his Integrated Energy Systems, Russia’s largest power supply and gas distribution company, which has both high debts and a significant investment programme.

More uncertainty surrounds the next steps of Mr Fridman and Mr Khan, who now have a vast choice of countries and sectors in which they could deploy their cash.

Alfa Group, their holding company, has already announced that it is setting up a “major, new international investment business” to focus on oil and gas, and a separate business that would expand its telecoms interests.

“On Alfa’s side there is an openness to staying in the oil and gas sector,” said one senior western banker close to the tycoons. Future deals, he added, are “more likely to be international than domestic”.

Mr Khan and Stan Polovets, chief executive of AAR, have held exploratory meetings with 25 major investment banks, private equity groups, and oil and gas consultancies, as they explore which investments to pursue.

They have also met former BP chief executives Lord Browne and Tony Hayward, with whom they worked during the early days of TNK-BP. Lord Browne is now a partner at Riverstone, the energy-focused private equity group, while Mr Hayward is at London-listed Genel Energy, the Kurdistan oil producer.

Mr Polovets said it was likely to be six to 12 months before the investors chose which options to pursue.

“We’re not in any hurry to make investments,” he told the Financial Times, declining to comment on whether Alfa saw specific opportunities with Mr Hayward or Lord Browne.

He added that Alfa was likely to pursue a number of deals alongside other private equity groups. “We don’t expect to create another TNK-BP,” he said. “That was a unique opportunity at a particular point in time.”

A former TNK-BP associate said that the planned new oil and gas venture fitted with Mr Khan’s previous work at TNK-BP, where he was the one largely running the company.

“Even when Fridman was there [as chief executive] Khan was the guy making all the decisions. He was good at it,” the person said.

“Say what you want about the ethical things but he’s good at squeezing efficiency out of [Russian oil and gas companies],” many of which remain highly ineffective, he added.

Outside oil and gas, Alfa is active in the telecoms sector where it owns nearly 50 per cent of operator VimpelCom and about 13 per cent of Turkcell where it is locked in conflict with Turkey’s Cukurova.

At the end of March, Alfa’s telecoms arm offered to buy out investors in Algerian telecoms group Orascom, a VimpelCom subsidiary, at an 8 per cent premium.

More recently, Alfa has sought to outbid Russian state-owned lender VTB for the Russian unit of Sweden’s Tele2 with counterbids through two of its subsidiaries. Both Tele2 and VTB insist their deal is closed.

A person close to Alfa said that the company had weighed bids for other targets such as EE, the UK mobile phone operator, and MTN, the South African telecoms group.

How committed Alfa will remain to Russia remains to be seen. In a statement in December, AAR promised to reinvest most of the proceeds from the TNK-BP sale back into the Russian economy, following up on a public request by Vladimir Putin who said that he “hoped” the cash would stay in Russia.

While some analysts wondered whether Mr Fridman would want to reinvest in Russia after being pushed out of TNK-BP by state-owned Rosneft, others called the deal and the new opportunities it offers a win for AAR.

“They have all the cash,” says the senior western banker.

“They should be psyched.”

 

From the ancien regime to fresh fields

 

Mikhail Fridman

One of Russia’s seven most powerful oligarchs in the 1990s, Mikhail Fridman is one of only two, along with Norilsk Nickel’s Vladimir Potanin, who managed to stay at the top. Ukraine-born Mr Fridman, Russia’s second-richest man with a fortune of $16.5bn, according to Forbes, started out reselling rugs and theatre tickets before co-founding the consortium then-known as Alfa-Eco in 1989. Over the years it has shifted from a small business selling computers and rugs to become Alfa Group, with assets spanning banking, oil and gas, retail and telecoms, including a stake in Turkish mobile operator Turkcell. The litigious 48-year-old has battled with partners ranging from the UK’s BP to Sweden’s Telenor. In 2011 he scuppered BP’s attempt to develop the Arctic with state-owned Rosneft. While the feud ultimately ended with Rosneft buying both BP and AAR out of TNK-BP,
Mr Fridman is no worse for the wear. AAR was bought out for $28bn, with Alfa pocketing $14bn.

German Khan

A classmate of Mr Fridman at the Moscow Institute of Steel and Alloys, German Khan is the quieter of the two, preferring to let his steely reputation speak for itself. Mr Khan, 50, is equally known for his role at TNK-BP as he is for a mention in US diplomatic cables made public by WikiLeaks. In these, American diplomats described his Russian hunting lodge as being like “a Four Seasons in the middle of nowhere” and alleged that Mr Khan watched the film The Godfather every few months, considering it “a manual for life”. An avid hunter, the Kiev-born businessman is worth $10.5bn, according to Forbes. A co-founding partner with Mr Fridman of Alfa Group, with interests in sectors from telecoms to Alfa-Bank, one of the largest privately owned lenders in Russia, Mr Khan these days is a philanthropist. His pet projects include the Genesis Philanthropy Group, which awards $1m every year to a scientist that exemplifies Jewish values.

Viktor Vekselberg

Possibly the closest of the four AAR tycoons to the Kremlin, Viktor Vekselberg has segued from natural resources to utilities, technology and art. The 55-year-old tycoon, worth
an estimated $15.1bn, was born in a small city in western Ukraine, and first earned his fortune selling scrap metal. Together with his schoolmate Len Blavatnik, he formed the Siberian Ural’s Aluminium Group (Sual) in the mid 1990s, which they eventually merged with Oleg Deripaska’s own aluminium group to form Rusal. Once chairman of Rusal, Mr Vekselberg quit last year after a row with Mr Deripaska. And while he still owns a small minority stake in the group, he has showed greater interest in the utilities sector, weighing potential deals through his Integrated Energy Systems, Russia’s largest power supply and gas distribution company. He is president of Skolkovo, prime minister Dmitry Medvedev’s techo-park project modelled on Silicon Valley. An avid art collector, he has repurchased a rare collection of Fabergé eggs and donated them back to the Russian state.

Len Blavatnik

Born outside Moscow, Len Blavatnik emigrated with his university professor parents to the US in the late 1970s and went on to attend graduate school at Columbia University and Harvard Business School. An American citizen since 1984, Mr Blavatnik returned to Russia around the fall of the Soviet Union, as the country’s natural resource assets suddenly became available for privatisation. After co-founding Sual with Mr Vekselberg, then TNK with his three partners, Mr Blavatnik began to focus on investments in the US, becoming one of the titans of the American music industry. Mr Blavatnik, 55, a Leonard Cohen lover, paid $3.3bn for Warner Music in 2011, and has won an auction for Parlophone, the former EMI label. In March, he invested in an up-and-coming music subscription service being developed by Jimmy Iovine and Dr Dre’s Beats Electronics. His net worth is valued at $16bn by Forbes

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