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Analysis & Opinion
03.02.11 Sberbank Debuts
By Tai Adelaja

Russia's biggest bank, Sberbank, has reportedly signed an agreement that could see the state-owned bank swallow up Russia’s second largest investment bank, Troika Dialog, as it tries to dabble in the investment banking business. Sberbank has agreed to buy Troika Dialog for $1.25 billion, the Vedomosti business daily reported on Wednesday, citing sources familiar with the deal. Sberbank's Chief Executive German Gref and Troika Dialog President Ruben Vardanyan have also agreed to value the bank at 150 percent of the value of the bank's capital, equal to $1.25 billion, the newspaper said.

The Troika Dialog Group is jointly owned by CEO Ruben Vardanyan, together with about 130 top managers, as well as South Africa's Standard Bank, which acquired a 36.4 percent stake in the wake of the financial crisis in 2009. Sberbank will initially buy a controlling stake and increase it to 100 percent within three years, Vedomosti cited its source as saying.

The initial plan is for Sberbank to buy 80 percent of Troika Dialog, including 36.4 percent from Standard Bank of South Africa and 43.6 percent from Vardanyan and other Troika shareholders, proportionally to the shares they own. The other 20 percent of shares will be bought up from Troika Dialog employees based on the company's financial results, which should be a motivational factor after the change in controlling ownership, the Vedomosti source said adding that Vardanyan and Troika Dialog’s top management are expected to continue working at the company for another two to three years. The Sberbank supervisory board is expected to approve details of the deal at a February 25 meeting, according to sources close to the board.

RIA Novosti first reported on Monday that the country’s top lender was planning to clinch the deal in a bid to develop its investment business by acquiring established investment companies, local or foreign. "At the expert level, a decision [on the purchase] has been made," RIA Novosti cited a source close to the deal as saying. "Now preparations are underway to have it approved by the bank's management board." On Tuesday, an unidentified source told RIA Novosti that Sberbank would buy "a major stake, almost everything, including the Standard Bank shares." However, another source in the financial circle told the agency earlier that Sberbank would buy Troika Dialog's investment and banking business gradually, over a period of two to three years.

Banking analysts said that making an acquisition rather than creating an investment unit from scratch will enable Sberbank to enter the investment banking business without having to deal with stiff competition from old established banks in the sector. “This looks like a promising merger as it generates synergy between Sberbank and Troika Dialog,” RusRating General Director Richard Hainsworth said. He noted, however, that Sberbank’s debut in the investment banking sector is not a game changer. “It is more about the fact that Troika will be able to use the balance sheet and the resources of Sberbank,” Hainsworth said. “We should bear in mind that the sector already has VTB Capital and this means that in a sense, the transaction will increase the competition in the state-run sector.”
Sberbank is the largest but not the first state-owned bank to run an investment banking business. That honor belongs to VTB Capital, which quickly gained market share after it was launched a few years back, and analysts have said that state ownership, while not the main driving force, certainly helped the bank to establish a strong foothold in the highly competitive investment banking business. “With its huge assets, Sberbank is a new strong competitor entering the investment banking sector,” Svetlana Kovalskaya, a banking analyst at Renaissance Capital, said. “While it is uncertain that success is guaranteed, its debut is expected to up the ante for other investment banks already working in the sector.”

Since taking the helm at Russia's largest savings bank in 2007, former Economics Minister German Gref has been seeking to diversify its business away from traditional lending and depository operations. Gref said in December that the Central Bank, Sberbank’s largest shareholder, would launch its investment business in the first quarter of 2011 by either buying a company or setting up an investment unit on its own. Negotiations about Sberbank's billion-dollar deal to takeover Moscow brokerage Troika Dialog has been on and off since 2008 and analysts say price has been a sticking point in negotiations. Troika has a book value of about a $1 billion, and Vardanian, who once rejected a $3 billion bid for the company in 2006, is reportedly looking to sell for a significant premium. Sberbank has so far valued the investment bank at $1.25 billion ahead of its intended purchase, Vedomosti reported Thursday, citing unidentified sources.

Vedomosti said the deal will likely be announced on Thursday during the Troika Dialog investment forum in Moscow. But Vardanyan told reporters earlier that no deal is expected to be announced. "We will not announce today, certainly. As long as there's no agreement, there's no deal," Vardanyan said, Interfax reported. Troika Dialog spokeswoman Polina Novoselova told Russia Profile on Thursday that all the media buzz surrounding the transaction is pure speculation, stressing that it is the policy of the company not to comment on hearsay. Analysts also believed that the delay in announcing a deal may also have to do with Sberbank’s attempts to arrange for a “transition period,” during which it can establish itself as an investment business and create an entirely different corporate culture required in the investment banking sector.

“This deal could be the jolt the market has been waiting for,” Maria Kalvarskaya, the head of equity research at Kit Finance, a Moscow-based investment bank, said. “As long as Sberbank adheres to the principle of transparency in its investment banking practices, it should be able to create great products for investors by leveraging its huge assets.” Kalvarskaya noted, however, that it will be difficult to gauge the impact of such a big player in the investment banking sector, since Sberbank is yet to unveil its strategy in the banking sector.

“Troika Dialog is by itself a strong player in the market and this acquisition is expected to bolster its influence further,” Kalvarskaya said. “The likely scenario is that Sberbank would attract most of the corporate and big clients in the business, while other small-size investment bankers would have to contend with serving smaller clients.”
The source
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