GOS SELLS TRAVEL AGENCY AS AMCIT WINS ARBITRATION

UNCLAS SECTION 01 OF 03 BELGRADE 000630

SIPDIS

DEPARTMENT FOR EB/IFD/OIA AND L/CID

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: KIDE EINV EFIN CASC PREL OPIC SR
SUBJECT: GOS SELLS TRAVEL AGENCY AS AMCIT WINS ARBITRATION

REF: 06 BELGRADE 1001 AND PREVIOUS

SUMMARY
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1. (U) On April 20, the Government of Serbia (GOS) sold its
70 percent share in the Putnik travel agency - and its
valuable real estate holdings - to Cyprus-based Acciona
Investments Limited for EUR 38 million. This rapid-fire sale
on the Belgrade Stock Exchange was concluded in the midst of
a takeover competition between Acciona and Russian
businessman Dimitry Lucenko, just days before the deadline
for accepting - or topping - Lucenko's offer. Lucenko cried
fraud and publicly warned foreign investors of the dangers of
doing business in Serbia. Just days after the sale, U.S.
investor Srba Ilic, the former owner of Putnik, received a
decision from an international arbitration tribunal ruling
that the Privatization Agency acted without cause in
canceling his purchase of Putnik and ordering the GOS to pay
Ilic some USD 12 million in compensation. END SUMMARY

ACCIONA EXPLOITS LOOPHOLE IN LAW TO ACQUIRE PUTNIK SHARES
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2. (U) On Friday, April 20, Cyprus-based Acciona Investments
Limited became the new owner of the Putnik travel agency by
acquiring the Government of Serbia's (GOS) 70 percent stake
for EUR 38 million on the Belgrade Stock Exchange. Acciona,
part of Russian construction-to-tourism company Metropol, had
opened the takeover battle for Putnik in early March. The
competition drew a second bidder, Russian businessman Dimitry
Lucenko, a director of Russia-based construction-to-
pharmaceuticals corporation Mirax Group. Putnik owns Sveti
Marko Island, a prime development property off the coast of
Montenegro, as well as several hotels.


3. (U) Acciona initiated the takeover and obtained approval
from the Securities Commission on March 12. Its initial
offer was RSD 3,600 per share for between 70 and 85 percent
of Putnik, or roughly EUR 28 million. The offer also
included a non-binding commitment to invest EUR 20 million in
overhaul of Putnik tourist facilities and in employee
training. Acciona pledged to repay Putnik's debts of some
EUR 12 million, provide a generous redundancy program, and
sweetened the deal by offering a one-off payment of EUR 500
to each employee.


4. (U) On March 19, DCM wrote to the director of the
Privatization Agency, the director of the Share Fund and the
president of the Securities Commission, to request that the
GOS refrain from any action with regard to the Putnik shares
in light of the pending international arbitration over
cancellation of the sales-purchase agreement by which U.S.
investor Srba Ilic acquired Putnik. DCM noted that any
transaction involving the shares could prejudice
implementation of the tribunal's decision, in the event that
Uniworld, Ilic's company, wins. (Note: On May 4, the
tribunal delivered its decision in favor of Ilic.)


5. (U) Nonetheless, on March 28, the Privatization Agency
decided to cancel an already scheduled tender for the sale of
Putnik shares, thereby freeing the Share Fund to accept
Acciona's takeover bid or simply sell the shares on the
exchange. Other suitors were invited to bid by April 2, when
Acciona's offer closed. Lucenko submitted a counter offer on
March 30 of RSD 3,700 per share for up to 85 percent, or
roughly EUR 29.1 million. He offered to increase investment
in Putnik's tourist facilities to EUR 30 million, repay
company debt, and offered a one-off payment of EUR 600 to
each employee. This counter bid was valid through April 23.


6. (U) Acciona responded by publicly questioning Lucenko's
takeover bid and asking the Securities Commission to examine
its validity, stating that Lucenko lacked financial backing.
It also floated the allegation that perhaps Lucenko intended
to buy Putnik with "connected persons," mentioning Mirax
Corporation.


7. (U) Lucenko countered that he would not be intimidated by
Acciona's attempts to "disqualify competition," and on April
18, he sweetened the offer to RSD 5,550 per share, which put
the value of the 85 percent stake at EUR 34 million. That
same day, Acciona withdrew its offer, citing dissatisfaction
over the failure of the Securities Commission to investigate
whether Lucenko was bidding with other unknown entities.


8. (U) On Thursday afternoon, April 19, the Share Fund
announced - on its website - that 70 percent of Putnik shares
would be offered on the stock exchange the next day, Friday,
April 20. Lucenko was prohibited by the Securities Law from

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purchasing these shares on the market, since he had a valid
bid in a takeover procedure. Subsequently, Acciona purchased
the state's stake at 6,000 dinars per share, or roughly EUR
38 million in total. This all occurred before Lucenko's
offer became valid on April 23. Lucenko has now filed a
complaint with the Commercial Courtin Belgrade to suspend
settlement on the deal, after which he plans to sue the Share
Fund over its decision to sell the shares on the Belgrade
Stock Exchange, while his takeover bid was pending.

GOVERNMENT CONTENDS IT RESCUED PUTNIK FROM BANKRUPTCY
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9. (U) Aleksandar Gracanac, director of the Share Fund,
characterized the Share Fund's actions as almost heroic in an
April 24 press conference. He said that the day of the sale
had been tense, with Putnik's debt reaching EUR 13 million
and the looming threat of bankruptcy. (Note: Gracanac's
assertion of bankruptcy risk is not credible; Belgrade judges
frequently refuse to declare bankruptcies, even when there is
cause.) He cited Uniworld's filing with the Commercial Court
on Monday, April 16, of a request for a temporary ban on the
takeover until the arbitration decision was handed down.
Gracanac indicated that the Share Fund moved quickly to
finish the deal before the first hearing in the Commercial
Court on Friday, April 20. A decision from the hearing could
have jeopardized the takeover. "We did this in the best
interest of the state following the law," the director said.


10. (U) Minister of Economy Predrag Bubalo said, on
television show "Poligraf," that the "privatization of Putnik
has been implemented in accordance with the law and at the
right moment because of the bankruptcy threat." He noted
that the Agency had announced on March 27 its decision to
sell Putnik through takeover or a share sale on the market,
with the buyer to be determined according to the best offers
under a transparent procedure: "The Share Fund offered the
package of shares at the stock market in accordance with its
legal authorizations, and the Share Fund did not have to
announce again its intentions to do so apart from the March
27 announcement."

SALE IRREGULARITIES
--------------

11. (SBU) Marko Micanovic, a securities expert at Altis
Capital in Belgrade, told econoff that there were several
irregularities with the sale of Putnik's shares. It is
telling that Acciona withdrew its offer on Wednesday, yet had
the money and paperwork completely in order on Thursday to
make the purchase on Friday. He said that, the day after
Acciona withdrew its takeover bid, brokers could see that a
large buy order at market price was placed for 70 percent
shares of Putnik. He believes that Acciona likely used its
funds from the takeover to make the purchase.


12. (SBU) Micanovic described the GOS's decision to sell the
shares on the exchange as "dubious" given a valid takeover
bid on the table. Usually, the Share Fund offers on the
exchange a stake between 25 and 35 percent in companies it is
selling. Selling 70 percent at once is highly unusual, he
said. In addition, since the buy order was at market price,
the Share Fund's broker could have made the sale at the
highest fluctuation price of RSD 7,200 per share. It is
unclear why the shares instead were sold at only RSD 6,000, a
difference which cost the government EUR 7.7 million.


13. (U) The takeover law is designed to permit a bidding
competition, to obtain the highest possible price for
shareholders. Instead, the state opted to sell at a price
marginally higher than the takeover offer, without permitting
Lucenko to better his offer. One observer pointed out that
the state could have ordered its broker to use an auction
method of selling the shares, even without formally tendering
its shares through the takeover. Instead, the Share Fund
specified a method that capped the price at RSD 7,200, then
apparently ordered its brokers to sell at RSD 6,000.

U.S INVESTOR FINALLY WINS AGAINST GOS
--------------

14. (U) The Privatization Agency terminated the sales-
purchase agreement (SPA) with U.S. investor Uniworld Holdings
in July 2005, based on its claim that Uniworld failed to meet
investment obligations under the SPA (see reftel for
history). Since then, the Agency tried several times -
unsuccessfully - to sell Putnik assets. In September 2005,
the Agency tried to sell Putnik via a tender, but Uniworld
obtained a court order that the Agency can not Qown, manage,
sell or encumber shares of PutnikQ until the completion of
the International Arbitration.

BELGRADE 00000630 003 OF 003




15. (U) The Agency then tried to sell Sveti Marko Island in
Montenegro, Putnik's most valuable asset. The 30-hectare
island represents about 90 percent of Putnik's estimated
worth of EUR 150 million. The Agency contended that while
the court order prohibited them from selling Putnik's shares,
it did not preclude asset sales. Uniworld once again
obtained a court order from the Commercial Court in Belgrade
to ban the auction, affirming that Uniworld was still legal
owner of the shares until the international arbitration
decided otherwise. While the GOS was able to overturn this
decision via an appeal to the Supreme Court, Uniworld still
was able to block the sale via the Montenegrin courts.


16. (SBU) Srba Ilic, owner of Uniworld Holdings, told econoff
that he believes the GOS's approval of the takeover procedure
and subsequent "fire sale" on the open market was a move to
sell Putnik's assets before the International Court rendered
its decision.


17. (SBU) On May 4, the International Court handed down its
decision in favor of Uniworld. Ilic was awarded USD 12.685
million plus interest, which covers his USD 5.2 million
purchase price, USD 1.6 million in partial return of
investments, return of the excursion vessel "Sirona", USD 2.2
million for reimbursement of the first bank guarantee cashed
by the privatization agency, and USD 82,500 for arbitration
costs. (Note: Ilic had an OPIC insurance policy on the
performance bond.) Ilic has a second arbitration pending for
another tourist agency he had purchased through
privatization, only to have the Agency cancel his contract.

COMMENTS
--------------

18. (U) GOS behavior in the Putnik tale is telling. All
parties to the Uniworld arbitration knew that the decision
was imminent; the Share Fund's haste clearly was an attempt
to evade the consequences of an unfavorable decision. At the
same time, the manner of the sale suggests collusion between
the Share Fund and Acciona. The fact that the shares were
sold at a predetermined price, without using an auction or
awaiting the end of the takeover to flush out the highest
price, demonstrates that obtaining best value for Serbian
taxpayers was not a key motivation in the Share Fund's
decision. Indeed, by selling on the market, rather than by
tender, the GOS gave up its leverage to lock in investment
commitments or pledges to workers; Acciona's promises are now
unenforceable. We wonder whether the impending change in
government, and the chance to make a fast buck before key
officials surrender ministerial seats, may have played a role
in this sorry affair. Our message to the GOS will be simple:
honor the arbitration results and pay Ilic in full.

POLT