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"Jump in Stratosphere", article on the sale of Pravex Bank in Forbes Ukraine, issue #7 (29)

Executives of the Italian banking group Intesa Sanpaolo had to push their way through a police cordon to get to the negotiation venue. The meeting was scheduled for the evening of 20 December 2007, the National Police Day in Ukraine, and the clamorous celebration show attended by Ukraine’s President happened to be in proximity to the National Palace of Arts Ukraina, whose conference hall was booked for the meeting. Yet, despite the roaring music, the parties were able to successfully communicate their ideas. In less than a year, Intesa Sanpaolo completed the acquisition of Pravex Bank from Leonid Chernovetskiy for $750 million, or six and a half times the value of the bank’s equity capital.

Chernovetskiy founded the bank in 1992 to support the operations of his holding company which included a real estate agency and a number of food and convenience stores. “During the first three years, I was searching for ‘my way’ of developing the bank,” Chernovetskiy told Forbes. “I saw it as copying the concept of my other successful businesses, i.e. reaping huge profits from a single transaction.”

Pravex made its first money thanks to the central bank’s foolish policy. Chernovetskiy recalls, “In 1995 or 1996, to increase the value of Ukrainian currency, the National Bank of Ukraine sold dollars to banks at half the market price. For one month, we would buy cheap and resell through our retail outlet at a higher price but still cheaper than our competitors.” By the end of the month, the bank earned several million dollars in profits.

FORCED WRITE-OFFS

New shareholders had to re-evaluate the assets of Pravex Bank

2008 – 6,075.3*

2009 – 7,268.0

2010 – 7,541.4

2011 – 5,655.5

2012 – 5,805.8

2013 – 5,180.9

*The bank’s assets in millions of hryvnias

Source: bank reports, National Bank of Ukraine, Interfax news agency

The next big thing was gold bullion bar transactions in which Pravex Bank became involved in 1998. Pravex brought gold to Kiev from Switzerland and quickly started to dominate the market. However, as Chernovetskiy put it, “These were fidgets with no vision.” In the early 2000s, Chernovetskiy finally formulated a strategy focusing on retail.

Pravex pioneered the use of first floor residential apartments as bank offices. This allowed to grow the bank’s retail network fast and cheap. With 86 branches in 2000, Pravex had more than 300 by 2005. Pravex eagerly recruited fresh grads. “The bank became the busiest recruitment agency in Ukraine,” says Chernovetskiy. “Our advertising campaigns reached the middle of nowhere. I personally interviewed for branch manager positions, and many of the people I hired later became the bank’s top executives.”

In the middle of 2005, Pravex Bank was Ukraine’s fifteenth largest bank by assets and one of the leading mortgage lenders. Foreign investors, who flooded Ukraine, were unlikely to miss it.

“The shareholders could see that competition with foreign banks entering Ukraine with their huge financial resources and innovative technologies would be quite challenging,” says Natalia Zubritskaya, former chair of the board of Pravex Bank. “They started thinking of selling the bank.” First offers came from a number of Russian banks, Kazakhstan’s TuranAlem and the Czech PPF Group. The Czechs offered to buy Chernovetskiy’s “recruitment agency” for $110 million, which Chernovetskiy simply ignored.

In spring 2006, Chernovetskiy was elected the Mayor of Kiev. His son Stepan, 27, became head of the Supervisory Board and decided it was time to sell the bank. “I completely trusted Stepan, an accomplished businessman, and fully dedicated myself to mayorship,” Chernovetskiy-senior says. Stepan convinced him that demand for Ukrainian banks reached its peak, and they had to seize this opportunity, Chernovetskiy recalls.

Rothschild and KBC Securities were chosen as consultants. In December 2006, contracts were signed and sale preparations began. The process took about one year and cost $20 million including the consultants’ fees. The bank went through a comprehensive audit and worked out a strategy meeting the expectations of prospective buyers. By October 2007, the consultants prepared an investment memorandum and sent it out to more than 10 banking groups.

By that time, almost all big players interested in Ukraine already found their targets for acquisition. French BNP Paribas and Crédit Agricole bought stakes in UkrSibbank and Index Bank respectively, and the Italian Banca Intesa was about to sign a deal with Victor Pinchuk to buy 88% in his Ukrsotsbank for $1.16 billion.

SELL HIGH

Biggest deals and their consequences

JULY 2007

Buyer: Swedbank

Object: TAS-Commercebank, TAS-Investbank

Seller: Sergey Tigipko

Price: $735 million

Assets value*: –85%

Net losses**: 5,235.1 million hryvnias

JULY 2008

Buyer: Intesa Sanpaolo

Object: Pravex Bank

Seller: Leonid Chernovetskiy

Price: $750 million

Change of assets value*: –29%

Net losses**: 709.8 million hryvnias

JANUARY 2008

Buyer: UniCredit

Object: Ukrsotsbank

Seller: Victor Pinchuk

Price: $2.221b

Change of assets value*: –22%

Net losses**: 28.9 million hryvnias

*Changes of the acquired bank’s assets value during the last 5 years

**On January 1, 2013

Source: bank reports, National Bank of Ukraine, Interfax news agency

Yet, while Pravex was preparing for the sale, the situation changed. In April 2007, it became clear that the deal between Banca Intesa, which merged with Sanpaolo group, and Victor Pinchuk fell through. Intesa Sanpaolo was among the first to respond to Rothschild’s investment memorandum. National Bank of Greece and Crédit Acricole – which already owned a number of Ukrainian banks – also showed interest.

The Italians suggested meeting as soon as possible. The closest date which fit everyone’s schedule was December 20; nobody noticed at first that it was also the National Police Day in Ukraine. “Almost all banqueting and conference halls had been booked, and we were lucky to rent a small conference room in Palace Ukraina,” says Natalia Zubritskaya.

The Intesa delegation was headed by Adriano Arietti, one of the executives of the International Subsidiary Banks Division. Pravex was represented by Stepan Chernovetskiy, Natalia Zubritskaya and a number of her deputies. The Italians were impressed with the level of security measures and the holiday atmosphere in Palace Ukraina. At the end of the meeting they were fully determined to strike a deal, Zubritskaya assures. Later after the meeting, Chernovetskiy-junior said that he estimated the bank at $0.7–1.2 billion.

For the two main contenders, Intesa Sanpaolo and NBG, Pravex created an electronic data room – a secure website with limited access rights containing all relevant documentation. Upon completion of the negotiations and due diligence, the Italians made an offer which the Chernovetskiys couldn’t refuse.

Initially, two sums were discussed: $800 million for the bank and its retail branches at first-floor apartments which were put on the balance sheet of a separate company, or $750 million without the real estate. The Italians preferred to lease the branch network from the Chernovetskiys rather than buy it.

The acquisition agreement was signed in the beginning of February 2008. At that moment, Pravex had 565 branches. Political opponents of Chernovetskiy accused him of the failure to change the legal status of most of the apartments/branches from residential real estate to commercial. This, however, didn’t prevent the deal from happening. A well versed lawyer, Chernovetskiy believes that he had no obligation to obtain permissions from authorities to use residential apartments as bank branches. “When I faced legal action from some crooked bureaucrats, I always referred to the Constitution of Ukraine which presumes the owners’ right to do with their property whatever they want,” Chernovetskiy told Forbes.

The Italians made the final tranche to the Chernovetskiys literally a couple of months before the crisis began. Do they regret their decision to buy a bank in Ukraine? Neither the representative of Intesa Sanpaolo nor Adriano Arietti, who no longer works for the group, agreed to answer inquiries from Forbes. By the beginning of 2013, Pravex Bank’s net losses exceeded 700 million hryvnias, half the branches were closed, and the share of overdue loans was 26%.

The results are not as bad as in some other financial groups which already left Ukraine, yet, there is nothing to be proud of. “The bank was retail-oriented, and both risk management and control of loans’ quality were rather poor,” says Yaroslav Kolesnik, former chair of the board of Forum bank. “It seems that the Italians believed they could quickly fix it, but they failed to take into account the market realities.”

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