GOVERNMENT "SHARKS" PUSH LARGE AMERICAN INVESTOR

C O N F I D E N T I A L BAKU 000461

SIPDIS

E.O. 12958: DECL: 05/16/2018
TAGS: ECON ETRD EFIN KCOR PREL PGOV AJ
SUBJECT: GOVERNMENT "SHARKS" PUSH LARGE AMERICAN INVESTOR
TO QUIT AZERBAIJAN

REF: 07BAKU533

Classified By: AMBASSADOR ANNE E. DERSE PER REASONS 1.4 (B,D)


1. (C) SUMMARY: In a sign of the difficult business
environment in Azerbaijan, a major foreign investor has
decided to sell its investment and leave Azerbaijan.
Russia's Baltika Breweries, a subsidiary of Carlsberg,
announced the purchase of Baku Castel on May 15. CEO of the
local brewery Baku Castel, Jean-Paul Lanfranchi, said that he
feared for his multi-million dollar investment and decided it
was time to sell and leave Azerbaijan permanently after being
told to sell 40 percent of the brewery to presidential
security chief Beyler Eyyubov. Lanfranchi said that there
were "too many sharks in the pool" in Azerbaijan and that it
was too difficult to do business. Citigroup Venture Capital
International and Lanfranchi led the group to purchase Baku
Castel in 2005 for USD 26 million, with Citigroup investing
92 percent of the capital. Lanfranchi said that there had
been previous offers to buy the brewery from Carlsberg and
Turkish Efes which he never contemplated until the recent
pressure by Eyyubov. Lanfranchi also sold his vineyard in
southern Azerbaijan under pressure to the Chairman of the
State Property Committee. While the sale of the Baku Castel
will not hurt Azerbaijan's "Doing Business" rating, the
tactics employed by local interests are a negative sign for
businesses looking to work in Azerbaijan. END SUMMARY.


2. (C) Jean-Paul Lanfranchi, the CEO of Brasseries
International Holding, the owner of local brewery Baku Castel
(the largest brewery in Azerbaijan),relayed on May 15 that
he decided to sell the brewery to Baltika Beer, a subsidiary
of Danish brewer Carlsberg AS, under pressure from
presidential security chief Beyler Eyyubov. Lanfranchi said
that in recent months Eyyubov had been contacting his offices
demanding Lanfranchi sell him 40 percent of the brewery. In
the end, Lanfranchi feared for his multi-million dollar
investment and decided it was time to sell the brewery in
Azerbaijan and leave the country permanently. There does not
appear to be a connection between Baltika and presidential
security chief Eyyubov. Lanfranchi said that there had been
previous offers to buy the brewery from Carlsberg and Turkish
Efes which he never contemplated until the recent pressure by
Eyyubov. (COMMENT: Eyyubov is rumored to be active in
numerous businesses on behalf of high-level GOAJ officials,
including several oil companies and the former jewelry chain
of jailed minister Farhad Aliyev "Prestige.")


3. (C) Lanfranchi said that there were "too many sharks in
the pool" in Azerbaijan and that it was too difficult to do
business. He rhetorically asked why the government acted
this way, adding that he does not have similar problems with
brewery investments in Armenia and Georgia. Lanfranchi said
that he and Citigroup had not planned to sell Baku Castel so
soon and had hoped to hold on to the asset for several more
years. Baku Castel was a profitable business and one of the
country's largest taxpayers. Lanfranchi hinted that
Russian-based Baltika Beer would be better suited to deal
with the local "sharks" as Azerbaijan's ruling elite have
many connections to Moscow and would not dare give problems
to Baku Castel's new owners.


4. (C) Lanfranchi also said that he has sold his vineyard in
Jalalabad to Kerem Hassanov, the State Property Committee
Chairman. Lanfranchi had previously sold a minor share to
Hassanov who then demanded a larger stake. Hassanov,
according to Lanfranchi, offered to sell his share to
Lanfranchi but warned that he would have problems with the
local authorities. Again fearing for his multi-million
dollar investment, Lanfranchi said that he decided to sell
his vineyard to Hassanov.


5. (C) In 2005, Citigroup Venture Capital International and
Lanfranchi had purchased Baku Castel Georgia and Azerbaijan
operations from French conglomerate Groupe Castel for USD 26
million (REFTEL). The new holding company, Brasseries
International Holding (Eastern) Ltd (BIH Eastern),owns and
operates the Baku Castel operations. Citigroup provided USD
25.3 million of the total cost, with Lanfranchi and a small
boutique mergers and acquisitions consulting firm, Sindicat,
providing USD 700,000. Of BIH, Citigroup owns 92 percent,
with Lanfranchi and the consulting firm controlling the
remaining 8 percent. As Azerbaijan's largest brewer, Baku
Castel has the capacity to produce 60 million liters of beer
per year.


6. (C) The sale of Baku Castel is pending the approval of the
Government of Azerbaijan antimonopoly department at the
Ministry of Economic Development. Carlsberg has sent a team
to Baku to do due diligence on the investment. Lanfranchi
said he talked to Economic Development Minister Heydar
Babayev, who reportedly was surprised by the decision to sell
the brewery.


7. (C) COMMENT: Baku Castel has been one of the largest U.S.
investments in the non-energy sector. Investment and
development of the non-energy sector is critical to
Azerbaijan's long-term development. Lanfranchi is not a
naive business investor. He was chief legal counsel for the
Groupe Castel and now has numerous investments in difficult
regions of the world, including central Asia and Africa.
While the sale of the Baku Castel will not hurt Azerbaijan's
"Doing Business" rating, the tactics employed by strong local
business interests are unfortunately too common in
Azerbaijan's difficult business environment. END COMMENT.
DERSE