Aeroflot confirms that government will sell part of its stake of 51%

Published: 10/4/1999

At a recent meeting with foreign investors, Alexander Klachin, Aeroflot's Deputy Director of Corporate Finance and Development has confirmed that the company has asked the Russian government to sell part of its 51% holding and bring in additional shareholders. Klachin also announced that Aeroflot is also interested in raising additional capital for its development through the partial sale of the government's stake, with the government retaining 25% of Aeroflot`s shares + 1. It remains unclear from reports whether the airline would receive the proceeds from the sale, although an investment tender could be structured to bring new investment to the company as part of the transfer of shareholdings. If it does not, it seems likely that a rights issue may accompany the sale. Given the low price of Aeroflot's stock at present, which values the airline at about $90m, a sale would be subject to resistance from both the government's representatives on the Aeroflot board and the Duma , which also has to approve the transaction. The government has however, been less than consistent in its views on the future of the Aeroflot stake. In July of this year Okulov reported that the government was going to increase its stake. This was met by a comment from the minister responsible for state property, Skylar, that the state couldn't afford to increase its stake, in fact couldn't even afford to subscribe to a rights issue. Other reports say the government needs the revenue, which is questionable given the very small dividends paid by Aeroflot. For Aeroflot raising capital by this method would be itself would also be premature in seeking to raise capital by this method at the moment given that it will be expensive, unless capital needs are more pressing than has been revealed to date and the company is unable to find funds from other sources. A method of getting around this stricture in the short term may be to sell the government stake to a trade buyer, in order to cement a broader alliance: a sale, which in terms of price, would probably reflect more accurately the long-term potential of the airline. To date, a number of airlines have been mentioned in terms of closer relationships with Aeroflot, including Lufthansa and British Airways, which recently signed an unspecified agreement with the airline. If the decision is made to place the holding with institutional investors outside Russia which, given the intention to use the market to fund the airline's future growth would be the targeted market, the airline is going to have to improve its communication with those institutions, in terms of its strategy and more general information flows. To date, these have been characterised by leaks, which have become institutionalised in Aeroflot's release of financial information, and by the use of accounting conventions that still remain grounded in the impenetrable Russian style.

Article ID: 933