Russia: Investors accuse S&N of 'unethical' business practice

Scottish & Newcastle has been accused by Russian investors of "unethical" business practice in attempting to buy out minority shareholders in four Russian breweries, Newsquest Media Group posted on July 25. Tony Froggatt, chief executive of S&N, has responded that the group has done "nothing improper or illegal".

Taimuraz Bolloev, the former president of Russian's biggest brewery, Baltika, and a friend of president Vladimir Putin, is leading a chorus of opposition to restructuring plans by BBH, Russia's biggest brewery group which is 50-per cent owned by S&N and which controls Baltika.

Bolloev has claimed that "the problems of the parent company (BBH) are being transferred to the disadvantage of Baltika" by overpaying for the minority stakes in the other breweries and embroiling Baltika in debt. BBH owns 74.5-per cent of Baltika, but the minority shareholders in Baltika are calling on Russia's financial regulators to block the approval of the deals.

Froggatt conceded at the weekend that the group might have been "a little too hasty". However, he said nothing improper or illegal had taken place and S&N simply "wanted to get those minorities on side".

Earlier this month, the rebel investors successfully blocked the first stage of the restructuring plans when they voted against taking its stake in the Pikra brewery, based in Krasnoyarsk, from 16-per cent to 70-per cent at a special shareholders' meeting.

Under Russian law, both S&N and its joint venture partner Carlsberg were excluded from voting on the proposals as interested parties. Less than half of the minority shareholders voted, and approval fell less than 1-per cent short of the required 50-per cent level.

However, leading corporate lawyer Sergei Alimirzoev, acting for the minority shareholders, said they are unhappy because Baltika would have to pay dollars-67.5m (pounds-38.5m) for Pikra to the parent company (BBH) which they believed was the "taking of money from one pocket and putting it into another pocket". He said Baltika shareholders were being asked to help BBH "solve their own financial problems".

Alimirzoev also claimed that a block of 8-per cent of BBH's shares in Baltika had been sold to related parties including Carlsberg or S&N in order to assist the vote. Carlsberg responded that it held an insignificant number of Baltika shares and had not participated in the vote, while S&N said it owned none of the brewery's shares.

Last Friday, the minority shareholders asked the regulator to exclude Hartwall Capital, which has a potentially pivotal 4-per cent stake in Baltika, from voting on any future proposals, as an interested party. They allege that the company is connected to S&N through Erik Hartwall, the former significant family shareholder in Helsinki-based BBH who on signing the deal became a major shareholder and nonexecutive director at S&N.

They have asked for the regulator to recalculate the results of the Pikra vote, claiming that if Hartwall Capital's votes are excluded the deal was approved by only around 25-per cent of noninterested shareholders.

The other breweries being targeted by Baltika are Yaroslavlbased YarPivo, St. Petersburgbased Vena and Zolotoi Ural.

The plan is to merge Baltika, Vena and Pikra into one brewing company. BBH has a market-leading 36-per cent share of the Russian beer market, led by Baltika where sales rose 24-per cent on the year to 200 million decalitres in 2004.

Aton Capital, a Russian finance house, says it believes the deal should benefit Baltika minority shareholders and that the consolidation of BBH's holdings under the Baltika umbrella is long overdue "as there is often the absurd situation where the two companies' brands waste marketing and advertising resources competing despite having a single owner".

Linda Bain at S&N said operational integration of the breweries was already underway and financial integration was unlikely to be delayed despite the opposition. On the complaints that too much was being paid for the Pikra stake as part of financial engineering, she said: "We have had an independent valuation and that has come out substantially less than the (multiples involved in the) current transactions in the market."

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