VTB Buys $2.5 Billion Magnit Stake as Founding Owner Quits

(Bloomberg) -- State-controlled VTB Group is buying 29% of Magnit PJSC from billionaire Sergey Galitskiy, who said investors don’t trust his vision for Russia’s second-largest food retailer after its share price plunged in the past year.

Galitskiy will quit as chief executive officer after selling 138 billion rubles ($2.5 billion) of shares to VTB, Magnit said in a regulatory filing. At 4,660.91 rubles a share, that implies a discount of almost 4 percent to the previous close. Magnit dropped as much as 7 percent in Moscow trading on Friday, to the lowest since 2012.

VTB Buys $2.5 Billion Magnit Stake as Founding Owner Quits

Galitskiy said he decided to sell because his views on running the company clashed with those of portfolio investors, as the market demanded fast growth and he preferred to focus on profitability, Interfax reported. “If investors want changes, they should get them,” he said, according to the news service. He will maintain a 3 percent stake.

While he built Magnit from scratch into an empire of more than 16,000 stores over the past two decades, generating revenue of almost $20 billion last year, Galitskiy struggled to manage the expansion as the economy slowed and he lost customers to rivals. Magnit’s shares have lost more than 50 percent of their value over the last 12 months as the pace of sales growth slowed and the company lost market leadership to billionaire Mikhail Fridman’s X5 Retail Group NV.

“This story looks weird,”  Vadim Bit-Avragim, a money manager at Kapital Asset Management LLC in Moscow, said by phone. “Many foreigners bought Magnit because of their appreciation for Galitskiy’s business acumen. With his exit, many investors are going to wonder about how effective the new owner is going to be.”

Sandwich Takeover

Chief Financial Officer Khachatur Pombukhchan will become Magnit’s new CEO, pending approval of the deal, according to VTB.

“It is purely an investment decision,” VTB’s First Deputy CEO Yuri Soloviev told reporters in Sochi, dismissing concerns about the Russian state’s growing presence in the economy. “When we bought a stake in the Burger King franchise, did you worry about the state takeover of sandwiches?”

VTB holds such investments for an average 2 years to 5 years, Soloviev said. VTB has been a financial investor in another Russian retailer -- Lenta Ltd -- together with U.S. fund TPG Capital, first buying shares in 2009 before selling down to about 3 percent. It also holds a stake in wireless carrier Tele2 Russia.

With its new investor, Magnit plans to pay dividends in the second half of 2018 and may also consider a share buyback, part of which would be used for a management incentive plan, the retailer said in a statement. CFO Pombukhchan told investors last month that Magnit would refrain from making dividend payments this year.

Galitskiy had a fortune estimated at $5 billion by the Bloomberg Billionaires Index before the announcement of the deal. Both he and Fridman were included in the U.S. Treasury’s oligarchs list this year.

©2018 Bloomberg L.P.