VZCZCXRO1361
RR RUEHPOD
DE RUEHBW #0630/01 1301543
ZNR UUUUU ZZH
R 101543Z MAY 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0787
INFO RUEHPOD/AMEMBASSY PODGORICA 0066
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

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 
------- 
¶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 
------------------------- 
¶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 
 
BELGRADE 00000630  002 OF 003 
 
 
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 
--------------------------------------------- -------- 
¶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