Russia is heading for a slowdown in merger and acquisition (M&A) transactions over the next six months, according to one of the country's leading dealmakers, Andrei Kosogov.

"It is not easy to purchase companies at the moment," said Kosogov, who is first deputy chairman of Alfa-Bank, and oversees all the bank's investment operations in Moscow. "Most of the obvious business opportunities have already been divided up between large players. It's difficult to find properties at the right price. It used to be much cheaper to make a good buy."

Kosogov headed Alfa's acquisition in April of a controlling stake (43.6 percent) in Golden Telecom, a telecommunications and Internet operator in Eastern Europe. "We saw the fall of the share price as an opportunity, and we took it," Kosogov commented. Alfa paid Global TeleSystems Inc. $110 million in the biggest Russian purchase of a U.S.-owned company this year.

Buyout option

The deal also includes an option for Alfa, together with Baring Private Equity Partners Group and Capital International's Global Emerging Markets Private Equity Fund, to buy out Global TeleSystems' remaining interest over the next 12 months.

"Our strategy will be to raise the capitalization of the company at least four to five times. The approach will be mergers and acquisitions in local and long-distance telephony, and the Internet."

Kosogov added that Alfa only concludes deals where it can control a company. "The one exception is STS [television channel], and that's because we are comfortable with the U.S. partner, Story First Communications."

Kosogov, 40, trained originally as a nuclear power station engineer. He first headed Alfa-Capital, as the investment arm of the bank was originally called, in 1992, when he supervised a staff of 30. In 1998, Alfa-Capital and Alfa-Bank merged. Today, according to Kosogov, the bank employs 5,600 people.

His first big deal was the sale in December 1994 to Danone of the Bolshevik biscuit plant. "That was a hard one," Kosogov remembers. In 1995, he arranged a merger of Alfa's cement production units with Holderbank, the Swiss-run cement industry leader. The next year he was behind Procter & Gamble's purchase of a Russian chemical and detergent producer. In 1997, "we arranged the sale of the Bor Glass Factory to Glaverbal of Belgium; Henkel's purchase of a detergent plant in Perm; the sale of regional confectionery factories to Russian investors; and the acquisition of a pharmaceutical plant in the Ukraine."

The main legal advisors to Alfa-Bank for these deals were Norton Rose and Clifford Chance. "Depending on the country we deal with," Kosogov added, "we involve the local law firms."

Kosogov said he has looked at the Kremlin's privatization agenda. But in the short term, he has found "there aren't really any good offers. The best has been taken already. We are always searching the lists of properties to be privatized, but recently we haven't seen anything we like."

Targets

Asked to identify what targets Alfa sees for M&A over the rest of this year, Kosogov said he is currently doing due diligence on companies in the telecommunications sector and energy infrastructure and companies developing high technology for deep space. "We like pharmaceuticals; we have a pharmaceuticals plant near Moscow. We are active in developing the television business. We own the Russian equivalent of Music Television and we are co-owner with Story First Communications of the STS channel."

‘No letup'

According to Dominic Gualtieri, a former Canadian diplomat who now heads Alfa's equities unit, "there is no letup in the search of Russian sectors that have yet to be touched by consolidation. You can make a loaf of bread from a lot of crumbs that's just as tasty."

Kosogov said that although Procter & Gamble remains a major client for Alfa-Bank, most of the current demand for Russian deals is coming from European companies, not the United States. "We have a lot of contacts with American portfolio managers. With U.S. strategic investors, there is a lot of talking, but no business." According to Kosogov, the reason for that is primarily the political perception of Russian risk in the United States.

The size of that risk has not attracted Kosogov's team to form partnerships with venture capital groups in America. "Nobody understands Russian risk better than we do," Kosogov said. "We ourselves can buy when we can see the risk and the opportunity. Why should we share? Right now, we have a dilemma on how best to use our resources and the pace of M&A is slowing down, but I'm still confident that in the future there will be bargains."