The man behind the most lucrative trade ever done: Len Blavatnik and the $7.5bn 'Lyondell play'

London’s Len Blavatnik is reaping a huge reward after risking his fortune when everyone else panicked during the financial crash

His employees call him “the King”, but Britain’s second richest man, Len Blavatnik, is wealthier than most royals. His empire spans from oil and gas to Warner Music, home to Coldplay and Tinie Tempah.

But for all the glamour of his artists’ roster at Warner, which he bought for $3.3bn, it is a brilliant trade he struck in the depths of the financial crisis that is becoming legend in the secretive world of the hedge fund billionaires.

So big and so successful has this one trade been that this year alone it has added more than $1.7bn to his personal wealth. Now totalling a return approaching $7.5bn, it is probably the single most lucrative trade for one man ever.

Gallingly, British taxpayers could have come along for the ride, had Royal Bank of Scotland not decided it was too risky and pulled out before the going got good.

But this deal has not always gone so well for the billionaire whose London mansion near Warner’s UK headquarters is worth £200m.

It all began back in 2005, when the Ukraine-born tycoon decided there was big money to be made in the chemicals business. He bought a mid-sized Dutch producer, Basell, for $5bn, using borrowed money plus $1.1bn of his own cash. The plan was to borrow more from the banks to buy up other firms and create a chemicals giant. In 2007, he found a Houston business called Lyondell, which he snapped up for $20bn. The deal was almost entirely funded by loans from banks, of which ABN Amro, later to be bought by Royal Bank of Scotland, fronted nearly $3.5bn.

It was a suicidally high price. The King’s own courtiers had warned him the deal was crazy, but, as he later told Forbes Magazine: “I was risking my money, not their money.”

Within a year, the financial crisis in full swing, it had become one of the worst takeovers outside the banking industry. LyondellBasell filed for bankruptcy, with Mr Blavatnik losing at least $1.2bn.

RBS, which by then had bought ABNAmro, was also wiped out. But, while RBS was in turmoil over other black holes Sir Fred Goodwin and his RBS executives had invested in, Mr Blavatnik was able to focus his attentions on Lyondell. Rather than retire to lick his wounds, he spent a further $1.8bn buying shares in the company as it emerged from bankruptcy.

It was the smartest move of his career. The trade, thanks to the dividends and surge in the share price, has now returned him some $7.3bn, according to filings viewed by The Independent. Sadly for British taxpayers, just as Mr Blavatnik was doubling up, Royal Bank of Scotland was selling out. It managed to get part of its loan converted into shares but it sold its stake in December 2010, taking a total loss of $1.3bn, sources said.

Had RBS held on, the investment would now be worth $1.8bn and it would have accrued dividends of a further $368m. But, as a banker who worked on the deal at RBS says: “You have to look back to what was going on at RBS at the time. There was just too much risk in exposing RBS to LyondellBasell.” Also in its defence, RBS’s fellow lenders like Goldman Sachs and Citigroup were also cutting and running with $1bn writedowns on their loans.

This year, LyondellBasell shares have surged 30 per cent, driving up Mr Blavatnik’s investment by $1.7bn.

Mr Blavatnik said he was “gratified” by the increased value of the company, adding in a statement: “Our belief in LyondellBasell’s potential has never wavered. We worked closely with [chief executive] Jim Gallogly and Apollo to turn the company around, and the steady increase in the value of our stake is a testament to our continuing faith. We have always stood by the company, during the reorganisation and after, and are now the largest shareholder, having recently increased our stake in July 2013.”

So he is not alone in having made himself a fortune on what has become known as the “Lyondell Play”. His profits are eclipsed by those made by the powerful Apollo hedge fund.

Apollo is run by New York billionaire Leon Black, who last year bought Edvard Munch’s The Scream for $120m. It specialises in buying debts of troubled companies, using them as leverage to agitate for change to enhance the value of their loans.

Mr Black spotted the opportunity to make a killing on LyondellBasell while it was writhing its way through the bankruptcy courts. He swooped to buy up debt in the company from its lenders at a massive discount to the original value of the loans.

It didn’t look like a clever move at first: the value of the loans fell even further. But Apollo hung in, later converting its debt into tens of millions of shares. The leap in the value of those shares as the company recovered, shedding many thousands of jobs, was probably behind Mr Black’s decision to sell most of Apollo’s stake. He sold two weeks ago at a reputed profit of more than $9bn.

Apollo and Mr Black have won much applause in the hedge fund world for their gambles. But, while their returns have been bigger, they are only investing other people’s money.  Mr Blavatnik, on the other hand, only plays with his own cash. 

That makes him the clear winner of the Lyondell Play.

The Lyondell Play: how the deal was done

2005: Blavatnik borrows from banks to buy Basell chemicals for $5bn. Puts up a fraction of the deal price from his own money

2007: He borrows nearly $20bn more to buy Lyondell and merges the pair

2008: Combined company struggles to make repayments on its $20bn-plus debts. Leon Black’s hedge fund starts buying the debt for as little as 20c on the dollar.

2008: LyondellBasell goes into bankruptcy. Blavatnik loses at least $1.2bn.

2008-2010: Blavatnik buys $1.8bn of shares as LyondellBasell emerges from bankruptcy. Black’s fund swaps its debt for a third of the company.

2010-now: Free of debt, the company pays out huge dividends. Blavatnik makes $6.8bn; Black $9bn.

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