TPG’s Russian adventure not as mad as it may look

October 8, 2010

TPG’s public travails in Russia are enough to scare away other private equity firms from the country entirely. David Bonderman’s shop is embroiled in a nasty battle for control of Saint Petersburg hypermarket chain Lenta. For a $110 million investment, it might seem a case study in why Russia is too much trouble. But the risks may just be worth it.

The fight between TPG and American businessman August Meyer, who owns 41 percent of Lenta, erupted last month when Jan Dunning, the CEO Meyer tried to depose in July, showed up at Lenta headquarters with armed guards to reclaim his office. Fisticuffs broke out and police detained 20 people.

TPG restored Dunning to his post but the fight isn’t over. Meyer is accusing TPG and its Russian bank partner VTB, who together own a 31 percent stake, in a British Virgin Islands court of forging documents to enhance its legal position and of violating various governance statutes.

Whatever the merits, Lenta looks a prize for someone someday. Its financial prospects differ depending on who’s doing the forecasting. If Meyer wants to buy TPG’s stake, he would naturally want to downplay Lenta’s worth — and vice versa for TPG.

Even accounting for these biases, Lenta looks on course to generate at least $200 million a year in EBITDA this year. At 10 times those earnings — midway between Wal-Mart’s valuation and the multiple it is paying to buy South Africa’s Massmart Holdings — Lenta’s equity would be worth about $1.7 billion. And the company is aiming to open new stores and paying back its debt of around $300 million.

On that basis, the stake held by TPG and VTB would be worth around $530 million, just shy of five times what they paid a year ago. That best explains TPG’s tolerance for the difficulties of doing business in Russia, where it is even now contemplating purchasing a stake in government-owned VTB itself.

Of course, this is all spreadsheet and mirrors as long as TPG is feuding with Meyer. It’s hard to see potential buyers, including Wal-Mart, wading into such a fractious situation; neither would investors in the public equity markets — even those accustomed to Moscow’s rough governance.

So without peace, returns will need to wait. This is the other side of the Russian equation that may be harder for TPG to work out.

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