The unsuccessful attempt by the Zeevi Holdings group to acquire, operate and turnaround Bulgaria’s ailing national airline company Balkan Air, sharply demonstrated the problems involved in penetrating former Iron Curtain countries. The root of the problem is quite obvious, at least in the group’s opinion.
The group's version of events is that the Bulgarian government, until recently communist, did not believe it was required to provide a foreign investor with proper information concerning one of the first companies it attempted to privatize. “Did not believe” is a diplomatic way of describing it. The group defines it as “the deliberate concealment of uncomplimentary economic figures concerning Balkan Air”. In its lawsuit submitted to the UN Commission on International Trade Law (UNCITL), it is stipulated as outright fraud.
The group became suspicious as early as mid-1999, but no-one imagined the situation would deteriorate to the current state of affairs, with elements that seem to have been taken from a thriller movie. Balkan Air’s Israeli CEO Zvi Frank was almost arrested by the Sofia police; all the group’s team is being evacuated back to Israel out of fears of being arrested; a lawsuit for hundreds of millions of dollars has been submitted to the UN; Bulgarian senior ministers are standing together against the Israeli group; and in the background, the company’s aircraft has been grounded on an abandoned runway in Sofia.
Arkia stays out
Zeevi, with memories of Africa, believed that after doing business in the black continent, Eastern Europe would be child’s play. Furthermore, he already had sporadic contacts in Bulgaria. Arkia had planned to become a partner to the acquisition, but got cold feet at the last minute about injecting money and the entire partnership idea. Some people said it was wise enough to back out, while others said it lacked courage.
Later, hints that Arkia would take part in advising the group during the acquisition and on operating the company faded, and the group was left on its own to face the Bulgarian government’s privatization agency, which tightened the timetable.
”We did not have enough time for due diligence,” Zeevi group chairman Joseph Antverg recalls. “We acquired the company within one to two months, based on presentations. It was the government that approached us and committed itself for the outstanding debts and assets, but the real picture became evident only after we signed.”
Grounded
Zeevi bought Balkan Air at a bargain price of $150,000 in exchange for shares, plus $6 million in cash and a commitment to inject $2.4 million a year for five years. One month after the first payment, signs started appearing that things were not developing as planned.
The government raised aircraft landing and departure fees ten-fold, in contradiction of its commitment. It did nothing when Syria and Lebanon prohibited the airline from landing on their territory when they learned of the Israeli involvement. “$15 million that was supposed to be in the coffers was simply not there,” Antverg adds, “And because of the situation, we have so far injected $20 million, instead of $8 million.”
Zeevi decided to ground Balkan Air and Bulgaria was left without a national airline. The lawsuit submitted to the UNCITL in France included harsh claims over the Bulgarian government’s credibility, in that it misrepresented facts in the negotiations with Zeev Group.
The group claims substantial clauses have been violated, including one about retaining Balkan Air as the Bulgarian national airline, which has led to the loss of markets, and making false presentations in the privatization agreement. For example, it omitted the fact that Balkan Air owns no shares in SITA, to which all the world’s aviation companies are partners and is traded on the New York stock exchange, as was first stated. The Zeevi group has appointed former Governor of the Bank of Israel and current Merrill Lynch senior executive Jacob Frenkel to arbitrate on its behalf.
In a fit of collegial sympathy, El Al announced it plans to replace Balkan Air in flights from Israel to Bulgaira at the height of the crisis and in the throes of delicate attempts to solve the complicated situation and get Balkan Air operating again. El Al stopped flying to Bulgaria, following the signing of an agreement with Balkan Air. The company said it plans to operate two weekly flights to Sofia, “to meet demand by the business community in Eastern Europe.”
Fear of arrest
After the lawsuit was filed with the UN, the Bulgarian government started attacking the Zeevi group. Rumors were voiced among official Israeli circles in Sofia that an arrest warrant was being issued against Balkan Air’s Israeli general manager Zvi Frank, who was due to arrive in Bulgaria from Italy. Israel’s Ambassador in Sofia telephoned to warn about the warrant and the group’s team rushed to the airport, and boarded an Alitalia flight from Rome to warn Frank.
An Italian airplane is Italian territory even when it is in a foreign country, but Frank nevertheless waited anxiously on the plane for an hour, until it returned to Rome, and continued to Israel. “In retrospect, it appears that a warrant was not issued,” the group admits, “but we could not ignore the warning or the fact that Bulgaria was a communist country until recently.
Zeevi faces legal action
In a court in Sofia, a claim by Bulgarian insurance company Bulstrad was debated over the dismantling of Balkan Air due to a $11 million debt. The Bulgarian government disclosed that the Zeevi group sold Balkan Air assets, including an office bloc at the Sofia airport and a hotel with a casino for $8 million.”
The Bulgarian government claimed that Frank sold the assets on February 12 this year, ten days after the first sale to Universal Aviation Services, registered in the British Virgin Islands. “It is not our job to decide the legality of the sale,” the lawyer appointed to manage Balkan Air Ralitsa Topchieva. Balkan Air has been put under receivership. Its assets have all been frozen at Dutch group TBI-owned Bulstrad’s request.
Bulgarian Minister of Finance Muravei Radev was more outright. “The deal in which Balkan Air assets were sold is illegal,” he said. “And it can easily be attacked in court.” Topchieva disclosed that the company has 42 Bulgarian and 200 international creditors. The concluding debate over the company’s future is scheduled for March 6, and the assets sold are expected to be used against Balkan Air debts to the Bulgarian government.
Regrets
Antverg was pessimistic last week, assessing that there was no chance of rehabilitating relations with the Bulgarian government. He even said that the group is increasingly sorry it entered the deal. “Globes” first reported two days ago that the group has drawn up a recovery plan for Balkan Air, likely to get it operating again.
”Only $15 million are needed to bring the company back to life,” Antverg says. “We’ll submit a proposal requiring the cooperation of the Bulgarian government. We propose the immediate freezing of past debts totaling hundreds of millions of dollars. The government should inject these funds and take care of other matters that have recently cropped up, such as the strange IOU of the Yugoslavian Railways, which we inherited as a Balkan Air ‘asset’.
”Yugoslavian Railways owes the Bulgarian government for years of passenger traffic on Bulgarian land. Government sources simply believed that Balkan Air’s new owners would have a better chance of collecting the debt. The IOU is worth $8.8 million, which could be used for the company’s recovery. I believe it can be rehabilitated, operated and made profitable.”
Despite the outburst of optimism, Antverg said last night that the group still regrets the entire business.
Published by Israel's Business Arena on 1 March, 2001