04 October 2013
Boris Krasnyansky interview to ‘Forbes’: ‘Buying more banks is not out of question’
It’s difficult to find a major businessman in Kyiv who never met Boris Krasnyansky. He has worked at PricewaterhouseCoopers, a major audit and consulting firm, for more than 15 years, as well as leading the IFD Kapital Group and chairing the Board of Directors at American Chamber of Commerce in Ukraine. Last year, the 54-year-old economist became Chief Executive Officer of Group DF, an international group of companies founded by Dmitry Firtash. In his interview to Forbes, Krasnyansky explained why Firtash bought unprofitable Inter TV Channel, why the Group’s chemicals plants suspended production, as well as explaining development plans for Nadra Bank.
– A year ago you became CEO of Group DF, a holding company with $6 bln in revenues and 100,000 employees. Were you invited to change the way this Group operates?
– The task set before me by Dmitry Firtash included structuring the Group, making it understandable and ready to work with international capital markets, including possible IPOs for some of Group DF’s businesses.
Unfortunately, the possibility of attracting financial resources in Ukraine is quite limited, and very expensive. By attracting more affordable financing from abroad, we will become more competitive. The Group owner has ambitious expansion goals, which is impossible without attracting additional financial resources.
– Having worked for the Group for a year, can you tell us about the changes that have already taken place, and are planned for the future?
– We have been working in different directions, and it’s a complex and comprehensive undertaking which will take more than one year to complete. We are right in the middle of this process. We launched a new corporate management structure and structured our businesses in divisions, along with normalising our legal structure for it to become understandable and with a clear division into holdings, sub-holdings and companies. This exercise results in some clean-up, getting rid of unnecessary technical companies created because of the rapid growth of the Group, but having no substance now.
– How many companies does the Group include now?
– It’s hundreds of legal entities. Of course, we don’t need so many of them. They are like excessive ballast consuming our time and financial resources.
– There are changes in personnel too…
– We are creating a new corporate management structure. We need to slightly restructure the management framework, so that it corresponds with the best contemporary practices, including creating supervisory boards in every single business. We’ve already done that in all of our core businesses.
We have established the Group Supervisory Council chaired by Dmitry Firtash. We are developing financial, M&A, budgeting and legal policies, which forms the basis for systematic operation of the Group. We are introducing systems of control and internal audit, and we are already making international audit for all of our businesses.
– Do you need this for IPOs?
– Not only for that. We also need it for placing Eurobonds and working with banks and international partners.
– You said that Dmitry Firtash has plans for his Group to expand. What are the directions for this expansion?
– We are constantly considering various M&A and joint venture options. There are dozens of potential M&A targets we are looking at. We are following two main directions. The first one is expanding one of our current core businesses. Here, we are definitely talking about titanium, gas distribution and chemicals industries. The second one is entering new business segments, but I wouldn’t want to go into much detail about it at this time.
– Will you have formed a holding company consolidating all of the Group’s gas distribution assets by the end of this year?
– The holding company will be created. But we won’t be able to finalise all the restructuring work and consolidation of all our assets into a single holding company, as well as further expanding our asset portfolio. I think this will be the goal for the following year.
– Will Gaztek form the basis of this holding company?
– We never owned Gaztek. We are in negotiations with Gaztek and other shareholders with the aim of consolidating more shares.
– Which ‘oblgases’ (regional gas distribution companies) are owned by Dmitry Firtash?
– There’s not a single ‘oblgas’ in Ukraine which is 100% owned by Group DF. We hold differing amounts of shares in various ‘oblgases’. In some cases we own more than 50%, in other cases a very small percentage of shares. In many ‘oblgases’ the state still holds 25% of shares.
– Recently, there was an industrial accident at one of Concern Stirol’s workshops undergoing repairs. What caused this accident, and how long will it take to restore normal operations?
– The governmental commission released its report, and I have nothing more to add to it. It was a technogenic accident. A few days ago, Rivne (Ukraine) hosted a large-scale conference initiated by the Federation of Employers of Ukraine (Mr. Firtash is President of this organization. – Forbes), with active participation of Ukrainian Chemists Union, relevant ministries and institutions, as well as representatives of all of Group DF’s industrial producers.
At this conference, Dmitry Firtash initiated enforcement of stricter industrial safety standards, as the existing ones are much too outdated. It is important to understand, that industrial safety at Concern Stirol corresponds to the standards applied in Ukraine. There were no irregularities, and this means that the existing standards are not strict enough. We realise that the changes we propose will increase our expenses, but we are convinced it is necessary.
– Does the Group plan major overhauls and inspections of the state of industrial equipment and pipes?
– One should not forget that we bought all of our industrial assets on the secondary market. They were built many years ago and require regular repairs. We have partially suspended production at some of our industrial enterprises, and are carrying out major overhauls. The costs of major reconstructions may exceed the costs of building a new plant from scratch.
– What kind of investments in overhauls are we talking about?
– In 2011-2013, Group DF invested $400 million in expansion and overhauls at its chemicals producers. Around 30% of these investments are related to safety improvements. This is more than required by the standards existing in Ukraine. But we believe that these standards should be stricter, as they were developed back in the 1950s. In fact, they should be reviewed every 5-10 years.
– Recently, Ostchem partially suspended production at some of its industrial companies...
– In fact we have almost completely suspended production at two industrial companies, and another two operate at 50% of their capacity. There are two reasons for this: the fertilizer markets are very weak, and this business is very dependent on gas prices. Natural gas accounts for 80% of the costs of fertilizer production. When gas prices are high and markets shrink, at a certain point, there is no economic sense in continuing the production.
We reached that point a few weeks ago; it was then that we started to suspend production. We continue to fulfil all of our social obligations, and our employees are being paid. But even in this way we are losing less. Following this, the markets reacted well, and ammonia prices went up quite significantly reaching the necessary levels for us to re-launch production following completion of repair works.
– How the government should support domestic nitrogen fertilizers producers?
– Personally, I am against any governmental aid. The less the government is involved in managing industries, the more opportunities these industries have in terms of planning and development. I don’t think that there should be any preferences in place. But I would prefer less interference.
– Do you have plans to sell any of your fertilizer producers in return for cheap gas supplies from Russia?
– At the moment, we have no such plans. But never say ‘never’. Any alliances, deals, expansions, mergers – anything is possible.
– What is the point of disagreement between the State Property Fund and Group DF on the joint venture at Zaporozhye Titanium & Magnesium Combine?
– The Agreement between the State Property Fund of Ukraine and Tolexis Trading Ltd covering the establishment of a Limited Liability Company (LLC) incorporating the assets of Zaporozhye Titanium & Magnesium Combine is still in force, and is not limited in time. Re-evaluation of this asset was the only thing that needed to be done. And it was done in June by the same independent evaluation company which did the initial evaluation. As the result, the price of this asset became a little higher than the initial one. But we offered an even higher price in our tender proposal anyway. So we do not understand why those statements were made. The delay with the LLC establishment is merely due to the red tape.
– What are your plans for development of Nadra Bank? Which goals are set for its management?
– First and foremost the bank has to further develop its retail business, which used to be the competitive advantage of this bank. Before the Nadra bank got into trouble and we came to its rescue, it had a wide-reaching branch network. It was a highly technological bank with a strong brand. It would be a mistake not to use this natural advantage, and not to try to re-establish its role on the retail market. The main goal of Dmitriy Zinkov’s team is to develop the retail business.
– What about Nadra’s corporate business?
– These days, it is very difficult to credit businesses. The resources are expensive, and it’s difficult to evaluate business prospects of borrowing companies in the current economic climate. Finally, the businesses themselves are not that keen on loans. There are no queues. But we are not shutting down the corporate business of Nadra Bank; it will continue to serve all categories of clients.
– Are you planning to expand your presence on the banking market?
– Banking is one of our core businesses, and we are planning to develop this business further. We are not ruling out the possibility of acquiring more banks.
– Earlier in 2012, Group DF acquired a media group which was valuated at $2.5 bln. According to Valeriy Khoroshkovskiy, the deal was done not for a market price. What made the Group pat that much for an unprofitable media asset?
– Even in economy theory, the fair price is the price of the deal. If two parties negotiated a price, then this price is fair, no matter what the analysts say.
– Why would the Group need a media asset that has been generating losses ever since 2009?
– Yes, but it was generating significant revenues before that. It’s a very interesting asset. Businesses often suffer losses, but our goal is to bring them back to profits.
– Ukrainian oligarchs like to have a standard ‘gentleman’s set’ consisting of a major industrial holding, a bank, and a TV channel. Viktor Pinchuk, Ihor Kolomoyskyi, Rinat Akhmetov have that, and now Dmitry Firtash has that as well. Is a TV channel one of the means of protecting your business?
– Are you answering the question yourself? I believe you can make money on television. It is a well-known fact that Inter was very profitable, which means it can become profitable again. The challenge facing the Inter management now is to understand why others in this business are getting profit while we are not, and to understand how we can make it work. It will not be possible to achieve this goal in one year, as it would be impossible to turn things around that fast.
– Information policy is a very important operational part of any TV channel. It is rumoured that Yevgeny Kiselyov goes to work “through” the President’s Office, where he receives his “assignments” (note – the interview was taken on 21 September 2013).
– I know Yevgeny personally, but I don’t have a habit of accompanying him in his morning walks. So I cannot comment on that. But it would be very strange indeed, if that was the case. The news production he is running starts broadcasting at 7 am, and Yevgeny works from early morning until late night.
I think ratings and shares of a TV channel are a good reflection of the independence of its information policy. If a channel becomes bluntly biased, its share usually suffers. I am completely satisfied with INTER’s level of independence.
– What was the reason for Yevgeny Kiselyov’s switch to Group DF (an additional question asked by Forbes on 2 October 2013)?
– It’s not a ‘switch’. There were two separate events. First was Yevgeny leaving Inter, and he explained that to the public himself. Second was Yevgeny being invited to join Group DF. Being the Chairman of Supervisory Council at Inter, I was the first to know about Yevgeny’s decision to leave. It was a rather straightforward decision for me to invite him to join our team.
– What does Mr Firtash think about an independent information policy?
– Neither INTER’s Supervisory Council, nor Dmitry Firtash personally interfere with the information policy of the channel. Look at how the news policy of the channel has changed: now we have new shows, a 90-minute “In Detail” with Yevgeny Kiselyov feature on Sundays; it already has rather strong TV ratings.
– Khoroshkovskiy says that he still hasn’t been paid in full. Can you clarify which portion has already been paid? According to our sources, post deal due diligence of the media group has now been completed; what are the conclusions, recommendations and plans of Group DF?
– We have been doing some audits recently. Most of them have now been completed. Nothing dramatic transpired. We have already announced all the details about this deal we felt relevant to disclose, and there is nothing I can add to that.
– Did you manage to negotiate a deal with the First Russian TV Channel and Svetlana Pluzhnikova, the widow of INTER’s founder, about selling their stakes in INTER?
– This is not a priority for us. There is no need to do it. At the same time, I believe we could take better advantage of the experience possessed by the First Russian Channel. Just look at the quality of its team and products. I’m not talking about political shows, but about the quality of their products in general. We should learn from their experience. We are not in negotiations about buying out their shares, but we may well buy out Pluzhnikov’s widow shares.
– When do you plan to make public listings of the Group DF businesses?
– The timing will depend on two factors really: when we are ready for an IPO, and when the markets are ready to buy in. At the moment, we can’t do the listing anyway, as none of our businesses are ready for an IPO. One more factor that can play against an IPO is how much do we need it? It can be that the markets are not ready for you, but you still need it badly! So you decide to go public. In a couple of years, some of our businesses might be ready for an IPO. But it doesn’t mean that we will necessarily go for an IPO, even though it remains a possibility.
– Valentyna Zhukovska, the former Chairman of the Board of Nadra Bank, and the current Honoured President of Cherkassy Azot, keeps fighting for a seat in Ukraine’s Parliament. Is Mr. Firtash standing behind that story?
– I have nothing to do with politics. My role in Group DF is to deal with its business, and only that.
This Interview was taken in course of the 10th annual Yalta European Strategy Meeting.