Mail.ru deal firms control over VKontakte

Russian internet group Mail.ru has solidified control over VKontakte, the country’s biggest social networking site, following a protracted three-way legal battle with VKontakte’s founder Pavel Durov and United Capital Partners, another VK shareholder.

Mail.ru, controlled by Russian billionaire Alisher Usmanov, bought UCP’s 48 per cent stake for $1.5bn in an all-cash deal financed with a $585m loan from Gazprombank and its own cash reserves. Mail.ru’s London-listed global depositary receipts rose 3 per cent on news of the acquisition.

The deal hands Mail.ru 100 per cent ownership of VKontakte, valuing the company at about $3bn, and a virtual monopoly on Russia’s social networking space.

According to ComScore, the social networking site has 61m users in Russia – or more than four times as many as Facebook, which has just 13m users inside Russia. Odnoklassniki and Moi Mir, Russia’s second and third largest social networking sites, also both owned by Mail.ru, have 54.3m and 27.6m users in Russia respectively.

The sale ends a legal saga that began last year when two of Mr Durov’s co-founders unexpectedly sold 48 per cent of VKontakte to UCP, a Russian private equity group with little experience in the internet space.

The change in shareholder structure soon prompted competing lawsuits from the main parties, with Mail.ru alleging that UCP’s acquisition of the stake had been illegal, and UCP alleging that Mr Durov had violated his fiduciary duties by using VKontakte employees and resources to create a competing instant messenger application, Telegram.

As part of Tuesday’s deal, Mail.ru, UCP and Mr Durov have agreed to drop all their outstanding litigation.

In 2013, VK reported revenue of Rbs3.8bn, a 14 per cent growth from the previous year and a net profit of Rbs53m. Full-year earnings before interest, tax, depreciation and amortisation for 2013 rose 32 per cent to Rbs1bn.

However, the corporate battle at VKontakte had brought governance to a standstill, with the deadlocked board unable to come to agreement about everything from the company’s overall strategic direction to who should fill the top management spots.

While the new agreement paves the way for VKontakte to move forward its strategic development, the social networking site has lost Mr Durov, the face of the brand in the process.

Mr Durov quit as chief executive in April claiming that Vkontakte had fallen under “full control” of the Kremlin, an allusion to Mr Usmanov, who is believed to be close to the government, and UCP’s President Ilya Sherbovich who has served on several state boards.

Mail.ru has repeatedly denied that it is working on the Kremlin’s behalf, arguing that keeping the site as open and unregulated as possible is in line with Mail.ru’s own financial interest.