Eastbridge Capital Partners warns investor community in view of expected public offering of Russian Ilim Pulp Group

Hong Kong - Moscow, Russia - Stamford, CT, USA - Eastbridge Capital Partners (ECP) claim investors might face substantial risks regarding Russian Ilim Pulp Group’s commercial activities and its management’s business practices. ECP has been a co-shareholder (50.9% voting control) with Russian Ilim Pulp Group in Ust-Ilimsk Woodworks OAO – a leading panel board manufacturer in Russia - since 2003.

The Federal Anti-Trust Service of the Russian Federation deemed Russian Ilim Pulp Group’s actions in the last 12 months as “coordinated and violating Russian legislation.” It was alleged that having witnessed high profitability from Ust-Ilimsk Woodworks’ operations, Russian Ilim Pulp Group’s management has repeatedly attempted to cause ECP to sell its shares to Ilim Pulp Group at below fair value and applying pressure generally associated with inappropriate business practices. While enjoying a substantial near-monopolistic position in the region for various product lines (including wood fiber supplies) Ilim Pulp Group’s managers have repeatedly engaged in price fixing and infrastructure sabotage (blocking roads to the Ust-Ilimsk Woodworks, etc.) in order to lower the going concern value of the enterprise.

Ilim Pulp Group were found to have purchased wood fiber at approximately US$12 per cubic meter in the open market, and the group’s management have made repeated and concerted attempts to sell it to Ust-Ilimsk Woodworks on an exclusive basis at US$24 per cubic meter. To “encourage” Ust-Ilimsk Woodworks sign on, they caused it to suffer repeated suspensions of steam, air and fuel oils supplies [by group companies] for what Ilim Pulp Group described as “technical and technological reasons”. The repeated stoppages resulted in the factory falling 25% below its production targets for the first three quarters of 2006.

The Regional Prosecutor’s Office is currently conducting an investigation into the activities of Ilim Pulp Group in the region. The investigation started following a series of revealing articles appeared in the Russian media linking Ilim Pulp Group’s regional executives to illegal activities. It is apparent, Eastbridge Capital Partners claim, that Ilim Pulp Group’s managers appear to be complacent with regard to authorities’ resolutions as well as demands put on Ilim Pulp Group by the local Ust-Ilimsk business community.

Hugo Barrett, Eastbridge Capital Partners Hong Kong-based Managing Director, said: “Recently, Russian mass media devoted much attention to the activities of Ilim Pulp who appear to be consolidating their assets, which some experts say, indicates an upcoming initial public offering. In connection with this, we would like to caution the investor community and Ilim Pulp’s business partners, that whilst presenting an apparent open front of good governance and transparent business practice in line with internationally accepted codes of conduct, Ilim Pulp’s management systematically continues to engage in highly inappropriate business practices reminiscent of the era of infamous Russian corporate wars, when the rule of corporate raiders prevailed over the rule of law. I guess one has to remember that Ilim Pulp Group itself came into being during, and as a result of, this highly unpleasant time in Russian corporate history.

“In light of their planned IPO, we find it remarkable that the Company’s top management continues to systematically fail to address these inappropriate business practices at a time when they wish to embrace the international investor universe. Their activities in Irkutsk region have led to sizable anti-monopoly and legal actions against the company on behalf of Russian authorities, as well as on-going prosecutor’s office’s investigations. The international business and investor community should be made aware of the inherent legal and management risks that Ilim Pulp’s shares shall bear, should they reach an IPO stage,” – Hugo Barrett stated.