Red October hunted in Russian chocolate battle

JOHN SHEPHERD

The hunt for Red October is on. Not the submarine in the film starring Sean Connery, but a chocolate factory on the banks of the river Moscow opposite the Kremlin.

Koloss, a food products company, is bidding $38.25m (pounds 24m) for a controlling 51 per cent shareholding in Red October, the chocolate producer recently released from state control as part of the Russian government's privatisation programme.

This is believed to be the first hostile takeover bid made in Russia. It is also thought by stock market dealers in Russia that Koloss is being used as a cover by a European company keen to sink its acquisitive teeth into one of Russia's best-known chocolate producers.

The bid torpedo fired yesterday at Red October was primed at $7.50 a share, a 28 per cent premium to the prevailing market price. Shareholders have been given two weeks to surface if they want to accept the bid.

Evasive action from the target is expected, according to emerging market analysts at UK institutions. Red October has ploughed a vast amount of roubles into promotion, making it widely known that it reveres its independence.

The company has also made it clear that it wants to avoid the path taken by some main competitors of becoming a junior partner in a joint venture with a European company. Executives from Red October tried unsuccessfully last December to raise development funds from an international offering of shares that was heavily promoted in London.

Koloss, also based in Moscow, is a subsidiary of the Menatep group. Financial advisers to Koloss work for Alliance-Menatep.

Yuri Milner, a director of Alliance-Menatep, said yesterday: "We are in the process of creating a first legal precedent for public bids in Russia, and hope that this operation will serve as a basis for future regulation in this area."

Red October faces a tough fight to remain independent. Besides being unable to appeal to foreign investors, Russians have become very coy about buying shares in the wake of the MMM pyramid investment scam and prefer to exchange roubles into hard currency.

Yuri Egorov, finance director of Red October, expressed concern over the outlook for his company's share price in Russia after the international fund-raising exercise collapsed.

Red October needs investment funds for plans to move to more modern facilities on the edge of the city.

The desperate plight of the rouble compounds the problems. Red October has to raise prices every fortnight to counter the currency's decline.

Meanwhile, competition is growing. Nestle of Switzerland and Danone of France have moved into the Russian market through joint ventures with indigenous companies and the population's appetite for imported Mars and Snickers bars is insatiable. Red October's 3,100 employees annually churn out more than 60,000 tons of drinking chocolate, caramel, chocolate and toffee sweets.