Cherkizovo Group toprepare for independence. Minority shareholders contest the purchase of Voronezhmyasoprom

June 22, 2012

Minority shareholders of Cherkizovo Group — Igor Babaev’s family businesses — are unhappy with the price of the newly purchased company Voronezhmyasoprom, bought for 4.46 billion roubles. According to the Prosperity Norges, East Capital and Fidelity funds, the transaction was made at an inflated price in the interests of majority shareholders.

On the eve of the next Annual General Meeting of Cherkizovo Group (it is appointed to June 29), some of the minority shareholders among which the largest are Prosperity Norges funds (0.6% of actions), East Capital (0.9%) and Fidelity (1.5%), sent out a letter to urge the meeting participants to vote for the re-election of Non-Executive members to the Board of Directors of the company.

The last purchase transaction by Cherkizovo Group of JSC Voronezhmyasoprom (a genetic and selection unit) announced on 13 June, became the reason for minority shareholder discontent with the operating structure of the Cherkizovo Board of Directors as explained in Prosperity. «We consider that the management of Cherkizovo Group, with the absence of truly independent directors in the Board of Directors, made the decision to purchase this asset at an inflated price» — reported a source, «Ъ"in East Capital. In the information reference which has been enclosed in the letter to shareholders (available on request according to the source «Ъ»), minority shareholders compare the purchase of the Voronezh assets to the similar JSC Orelselprom acquisition by the Group in 2011. They say in the document, that there were identical characteristics in the separate assets but Orelselprom’s estimated value was two times lower than that of the Voronezh plant: 2.2 billion roubles and 4.46 billion roubles respectively.«The cost of the fixed assets of Voronezhmyasoprom can be estimated at approximately 2.5 billion roubles. Considering debt of 2.8 billion roubles, the company has negative equity» according to Nikita Krichevsky, the Chairman of the Advisory Council Support of Russia.

OJSC Cherkizovo Groupis Russia’s leading integrated and diversified meat producer. It owns seven meat-processing plants, seven pig factory farms (three more are under construction), two poultry-farming plants and feed plants. The main shareholders of Cherkizovo Group are Igor Babaev and members of his family owning 61.5%. The free float amounts to 38%. Turnover of the Group in 2011 amounted to about $ 1.48 billion, EBITDA — $ 245 million.

Minority shareholders also draw attention to that fact that the owners of the Voronezh enterprise are the National Agro Industrial Company (NAPKO) is also under the control of the main owners of Cherkizovo Group, Igor Babaev and members of his family. SPARK data indicates that 99.9% of Voronezhmyasoprom belongs to NAPKO whose main founder is Cyprian NAFCO LIMITED 66.11%, and 8.47% from Evgeny Mikhailov, Igor Babaev, Sergey Mikhailov and Lydia Mikhailova.

Cherkizovo Group consider the minority shareholders to be unreasonable. «Before the transaction there was an independent assessment and an independent legal audit of the acquired assets. Assets were valued on a cost base analysis. Details of the transaction and the cost were carefully considered by Non-Executive Directors who have extensive experience both in agro business, and in audit, and the transaction met with their approval. We consider that Cherkizovo Group got these quality assets at a good price and these assets will be strategically important for the Group’s development», said a member of Board of Cherkizovo Group, Alexander Kostikov.

Ivan Kushch, an analyst at VTB Capital found it difficult to estimate the cost of the acquired assets. «If you compare Voronezhmyasoprom to the Orelselprom purchase, the production facility generates a certain cash flow. Voronezhmyasoprom in itself doesn’t bear any value, and so we are urging Cherkizovo Group to strengthen its vertical integration and help the company generate profit» — says Kushch. However, Mikhail Krasnoperov from Troika Dialog believes that looking at it as a set of assets, the price for it could be slightly lower, but as a whole looks normal.

The question of a change of Non-Executive Directors was brought to the meeting agenda by a representative of the Prosperity fund. At present, according to company materials, the question is included in the agenda «about the quantitative structure of the Board of Directors of company».