Old ways linger - Can one do business in Europe the #Russia way?

Late in 2018, bad news came in for DIA Group, a Spanish supermarket chain and Europe's third largest food sector franchiser. As reported by the FT, by December the chairwoman and chief executive had resigned, the head of finance had been fired, the company’s shares fell 80% just over a year, and dividends plummeted.

In that dramatic context, a DIA’s shareholder and at the time owner of 29% of the company Russian magnate Mikhail Fridman made an generous offer of a €500m injection, and a buy out of a significant bulk of shares.

The voluntary tender offer was complemented with a ‘rescue plan to secure the future of DIA’.  L1 Retail (the company that manages Fridman’s assets) announced that ‘under the right leadership and governance, DIA could re-establish its leading position in Spain to the benefit of the Spanish economy’. L1’s offer was supported by the majority of shareholders, so in May 2019, L1 got control of just under 70% of DIA’s capital, with the obvious plan of getting the total ownership in the end.

The L1 Retail rescue plan consists of three stages. With two of them behind (the injection and buy-out), the remaining part is a transformation, led by L1 Retail. ‘The idea is to save the company.  It’s extremely badly managed and we think it could be a great company,’ Fridman told the FT.

The story looks like a positive scenario of saving a business in distress with an established businessman in the lead role, yet at the moment Fridman is probably the least popular person in Spain.

There are particular reasons for the Spanish authorities to doubt Fridman’s good intentions, based on a symptomatic precedent. Currently, the Spanish National court has Fridman under official investigation for corruption - he has been accused of having designed and arranged the bankruptcy of another Spanish company by running ‘a series of actions that led to the insolvency of ZED Worldwide SA... in order to buy it at a ridiculously low price, much lower than that of the market,’ the court document says.

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The businessman was a shareholder and creditor for ZED, and according to the National Court had ‘a privileged position for any type of decision in the group’. He also controlled Vimpelcom, a huge mobile phone operator that by altering contracts with ZED caused a significant drop in its revenue, which in its turn made it impossible for ZED to handle a €140-million loan, in part provided by one of the banks that Fridman controls.

After ZED applied for bankruptcy in June 2016, Fridman’s people bought ZED for €20 million, ‘much less than its value when blockage maneuvers controlled by Mr. Fridman started,’ claim the Spanish prosecutors. When referring to L1’a actions they use the word ‘raiding’.

Could DIA be repeating  ZED’s fate? Very likely, says the Spanish press.

After the Russian businessman got his 29% stake, he got the power to dictate terms. That’s when the chairwoman and chief executive left the company and were replaced by L1’s people. As reported by El Pais, it launched the worst period in DIA’s history – the sales and goods quality dropped, there appeared more and more flaws in the supply and logistics processes, while the suppliers couldn’t get their pay in time. The staff grew so worried about their future that they went on strikes, making the situation still worse.

As for the shares, at the moment of L1’s latest buyout they cost under €0.40 – a drastic change from the price of €4 they were trading at when Fridman bought the 29% stake.

In his interview to Radio Liberty  DIA’s shareholder Rodrigo Fernando Perez said: “It seems that the company gets damaged intentionally in order to then buy all of its shares at a lower price. And there is just one person behind this, Mr. Mikhail Fridman. He has a lot of money; he is a very rich man. And he apparently wants to buy DIA very cheap. Does it border on fraud? Absolutely. Not to mention the fact that hundreds of people get ruined."

Yet some people say they saw that coming. When L1 made the offer to buy DIA’s shares out, not all comments from the business community sounded optimistic. In particular, Fridman’s peers from back in Moscow said that in Spain the magnate seemed to be performing his signature trick of hostile takeover, the one he had perfected in the turbulent world of Russian business.

Hostile takeover, or as some mildly put it, ‘aggressive negotiations’ have long been considered Fridman’s trademark. His Russian A1 Group features  in dozens of ‘aggressive acquisitions’ stories: food and beverage producing, pharmaceutical,  metallurgical and mining enterprises, oil and gas companies would all go into the list of A1’s controversial business endeavours.

“Fridman and his partners… are all but the only Russian billionaires building big new businesses in the west — which is all the more interesting since their investment ideas and corporate wars are so reminiscent of Alfa’s Russian past,” wrote the Bell.

In 2013, after selling his most impressive asset (TNK-BP oil producer), Friedman moved to London, and started establishing his business in the West. The rumours say he wants to sell Alfa-Bank, his flagman business, and leave Russia for good, which he strongly denies. The magnate claims that he has moved the focus to Europe only to test his abilities in the new playground: ‘For me I think it’s a great interest, privilege, and challenge — to try to repeat our success that we made in Russia in a much more sophisticated and competitive market.’

Would he be able to? In the years of his formation as an oligarch in the chaotic post-Soviet Russia there was a lot one could get away with. Could these ‘old ways’ work to do business in Europe today? The answer is with the National court of Spain.

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