Experienced manager Boris Krasnyansky was hired by billionaire Dmitry Firtash to manage Group DF, the fastest growing business-group in Eastern and Central Europe. Mr. Krasnyansky has plans to make his new employer Group DF a “Made in Ukraine” multinational giant.
In 2009, Dragon Capital investment company assessed the assets of Group DF owner, Dmitry Firtash, at USD 354 million. In two years, this figure grew quickly to USD 2.25 billion with a growth rate exceeding 500% per year. But there was more to come: in 2012 the businessman acquired 49% of Zaporizhya Titanium and Magnesium Combine. Later, early in 2013, Dmitry Firtash, in partnership with the Head of the Presidential Administration of Ukraine Sergey Levochkin, acquired Inter Media Group (IMG), the holding company of INTER, INTER+, NTN, K1, MEGA, ENTER FILM, K2, PIXEL and MTV Ukraine television channels.
It is hard to find another case of such rapid capital growth anywhere in the world. It is hard because there is no such case.
This dynamically growing group is managed by Boris Krasnyansky, Group DF CEO, who can be considered another successful acquisition of Mr. Firtash in 2012.
Former Managing Partner at PricewaterhauseCoopers in Ukraine and strategic consulting expert for Central and Eastern Europe, Russia, Turkey, Greece and Israel, Boris Krasnyansky has his current office in the 33-storey Parus Business Center, which also belongs to Group DF. His personal office space is the same size as the local maintenance administrator’s office and is a luxury-free zone: there’s only a desk, a couple of chairs and a separate area to prepare a cup of coffee.
The interview started with Korrespondent asking the 54 year old manager about Group DF’s recent acquisition of IMG company. Next he explained why Dmitry Firtash is only interested in acquiring assets the size of a whole industry; why Group DF is putting all regional gas companies under one umbrella, as well as the reason why nobody in Ukraine likes big businesses.
– Nowadays television business operates at a big loss. Why did Group DF buy such an unprofitable asset?
– True, today television is in the red. But we should not forget that this business used to be highly profitable until 2008. We all know the crisis hit everybody, has lasted a long time with the result of advertising budgets being cut. Apart from that, it’s a matter of faith: can this business become profitable or not? And we are convinced that in the long run television business can and should be profitable. It makes no sense getting involved in this kind of business with only short-term goals.
– In November, Dragon Capital assessed all of Valeriy Khoroshkovsky’s [former IMG owner] assets at USD 395 million. What is the reason for the overpriced USD 2.5 billion acquisition of the television group?
– The amount made public may certainly seem outrageous. But the curious fact is that before the crisis, when the former IMG owner was preparing this asset for IPO, investment bankers estimated its value as high as USD 4 billion. If you would try to calculate (back then) the discounted cash flows, you would not reach the amount of USD 4 billion. Based on this method of calculation the company would be worth less than zero. This would mean that we should be paid for taking it. But there is one simple concept in business theory and practice – the fair price concept. It is the price of the closed deal. IMG owns several television channels, besides 61% of INTER channel. INTER has two more shareholders – First Russian Channel and Svetlana Pluzhnikova, the widow of the channel’s founder. We are now in negotiations with them, by the way.
– How does it happen that while every other business in the world is suffering from lack of funds, Group DF, whose business is concentrated in one of the poorest European countries, makes massive acquisitions of extremely expensive assets? The amount of money spent in a couple of years exceeds the whole wealth of Mr. Firtash. Please tell us about the secret “source” – where does the money come from?
– Every acquisition has three sources of financing: first – own capital, second – loans, third – acquisition structuring. Many deals are divided into several stages. Also, one must not forget that the businesses we have are producing income. We have ambitions to increase our assets, not only in Ukraine. We want to invest USD 2.5 billion [more] in the titanium industry. We are currently negotiating with Russian, Asian and European banks.
Take a look at the Ukrainian banks. They have plenty of funds, but are they ready for investments or loans? I don’t think they are, due to the strict regulations. On the other hand, there are not many convincing business plans that offer return on investment.
– Nowadays in Ukraine only two businessmen, Dmitry Firtash and Rinat Akhmetov, significantly accumulate capital. How can you explain this?
– I was recently told by an IMF high official that Ukraine is one of the most profitable countries in the world. And the reason for that is its low level of capitalization.
There is not much capital in Ukraine. GDP per capita here is lower than in any other CIS country. Take the example of the agricultural sector. Per each USD1 invested, the return is ten times higher in Ukraine than in Europe, thus investing in Ukraine is economically viable.
If we make agribusiness more effective, Ukraine can grow much faster than the rest of the world. But of course the moratorium on the sale of land should be lifted so that land can be used to attract investments.
I believe Ukraine should focus on strategic industries. What does it mean? It means those industries which can make Ukraine a leader in global ratings. Right now, Ukraine is not really visible. When I was in Davos [for the World Economic Forum] a journalist asked me “What opinion does Switzerland have about Ukraine?” I replied “Zero opinion”. We need to become noticeable. If we consolidate agriculture, production of fertilizers, metal industry, and, I think, titanium, we can enter the top five players in these sectors. We will become visible, and we will shape markets. It will attract investment and create new job opportunities.
– This is exactly what seems strange: investing is “economically viable”, while assets are being acquired only by SCM, the company owned by Akhmetov, and Group DF.
– If you are trying to hint that we enjoy special conditions, take a good look at our purchase of nitrogen enterprises. They all were bought in the secondary market. We paid big for each one of them. Acquisition prices were not made public, but everyone is more or less aware of them. It was real money paid to the real owners. Look at our latest deal [acquisition of IMG company] and you will see that companies are acquired at really high prices. Nobody else is lining up to buy them. The only exceptions are the titanium enterprises we are buying from the state. But these deals differ from the privatization model of the 90’s. We are acquiring these assets at the present moment.
– Ostchem company, part of Group DF and the only large private natural gas importer in Ukraine, supplies 25% of the gas volume to the country. How did Dmitry Firtash get into this position?
– You know that, since 2009, Naftogaz NJSC used to be the gas monopolist. In fact all intermediaries were eliminated from the gas market. Logically, under such circumstances, prices for gas increased. Last year, this monopoly was canceled and now anyone can participate in the gas supply business. Why are we the ones involved in it? I see two reasons. First, it’s obvious for everyone that we know what we are doing. And whatever rumors say about RosUkrEnergo [intermediary company owned by Mr. Firtash], if you compare prices Ukraine was paying then [when RUE supplied gas to Ukraine] with those it’s paying currently – there is a huge difference.
– Can we call the RUE story a positive one?
– Absolutely! It was a win-win situation for everyone. The second reason why we are buying gas directly is that we have no alternative. Depending on the type of products our chemical enterprises manufacture, the share of gas in their production cost is 65% or more. We have bought 8 billion of cubic meters of gas, and Group DF’s producers together with the Odessa Port Plant consumed 6.3 billion of cubic meters. Our business is dependent on gas to such extent that we couldn’t but try to supply ourselves. It’s a critical issue for our business.
– In October 2012, you told Korrespondent that Dmitry Firtash is not involved in the Gaztek company which acquires assets of regional natural gas distribution companies. Who stands behind this company then? Is it possible for the largest consumer and one of the largest gas importers not to be aware who is in control of this energy business?
– Gaztek is not owned by Group DF. We know who owns it, and we are now in negotiations with this and other companies which acquired stocks of the regional natural gas distribution companies in order to buy their shares. We would like to consolidate assets in this sector, after receiving approval of the antimonopoly authorities, of course. I believe we are going to own a considerable share of all gas distributing companies in Ukraine.
– Who owns Gaztek company?
– This question is not for me to answer.
– Why do Ukrainians dislike billionaires? Who is to blame – businessmen or financially struggling people who didn’t get anything?
– A similar attitude to this issue can be observed in other countries as well, not only in Ukraine. We can say the same about Russia where big money was made very quickly. Lack of trust towards rich people and business owners creates an image of the enemy, because people do not understand billionaires’ role in society. All billionaires without exception are people with big ambitions and talent. Not every human is like that. They can be compared with talented painters or film directors. There are not many people of this kind. They never stop working. I realize that I will not call for sympathy from the majority of the population talking about hard working billionaires. But it is a fact. They are capable of creating something special. Many of them say “When I turn 40 I will stop doing business and will enjoy sun in the Seychelles or Caribbean”. None of them did so. These people are driven by hard work. They create jobs, and it’s a fact.
– In October 2012, Korrespondent discovered Mr. Firtash’s key to success as the businessman. First is consolidation of all assets in a particular industry. In fact, creating monopoly on a strategic market. Second is having his business interests closely linked with officials in power. Firtash is good friends with former First Deputy Prime Minister Khoroshkovsky, Deputy Prime Minister Yuriy Boyko, as well as with current Head of Presidential Administration of Ukraine Levochkin. Please add to this list, or remove what is untrue.
– Concerning acquisition of whole industries – you are right, it is the approach of Mr. Firtash. His vision is to do business in those sectors where he can transform an industry as a whole. You have to determine such an industry first. Those industries are titanium, chemicals, gas distribution. We are not yet present in the agricultural sector; we are still looking for attractive opportunities. The greenhouse complex in Ternopil region [a project developed by Mr. Firtash and worth EUR 30 million] is a non-core project. We are not afraid to say that we plan to consolidate the gas distribution sector. We want to increase our presence there. We can say the same about the chemical industry. We are not ashamed to announce that we own a majority of nitrogen fertilizer producers in Ukraine. Moreover we would also like to acquire the Odessa Port Plant.
– By owning the majority of Ukraine’s chemical producers you monopolized the internal market, which means limiting competition, preserving high prices etc.
– Even though we acquired the majority of nitrogen producers, but we did not monopolize the domestic market. Russian, Belorussian and other foreign producers sell their nitrogen fertilizers in Ukraine, and all of them compete on the market. The consumers have enough choice. But we are still far from being number one on the global market. We are only planning to establish our foothold on those markets. Regarding the gas business, let me give you an example. If you live in Kyiv you can buy gas only from the Kyivgas company. It is a monopoly by definition. Does it make any difference for the final consumer whether it is 50% or 25% of the gas distribution business of Ukraine being owned by a single company? Gas distribution prices are set by the state regulator for each consumer category. Remembering the fact that this business has a high risk of explosion, the infrastructure must be serviced by large companies, because having many small-size companies servicing gas networks leads to high risks.
– What about the second part of my question?
– You mean your question about officials in power? I cannot give you names. It will not be ethical. But what I will tell you is that, in any country, the private sector has to cooperate with the public sector.
Source: ‘Korrespondent’ magazine