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Selling more silver

Needing cash, the Kremlin is willing to sell a stake in Bashneft and maybe even Rosneft

A combination of sanctions and a low appetite for Russian risk will make the latest privatisation programme, including a majority stake in oil-producer Bashneft, a hard sell – but the Kremlin is betting strategic buyers will swoop in to buy energy assets at bargain prices.

Russia’s privatisation track record is hardly studded with glory. Ordinary Russians are still furious that a handful of sharp operators ended up with the Soviet Union’s corporate gems through the flawed vouchers-for-shares schemes of the 1990s. So-called “people’s IPOs” of oil-producer Rosneft and lender VTB a decade later were also unpopular – share prices sank following the initial listings.

This time around the sale won’t involve uppity ordinary folk. A senior source at the finance ministry indicated that the buyers will mostly be strategic Russian investors and others in emerging markets. Westerners won’t get a look in and nor will the stock market. The planned Bashneft sale – for just over 50% -- could raise R400bn ($6bn); that for some part of Rosneft, R500bn.

With the federal deficit widening to more than 3% of GDP, the Kremlin needs the cash. The ousting of Olga Dergunova, head of the agency responsible for controlling the asset sell-off on 12 April, indicates a new-found urgency.

Dergunova, who had led the State Property Agency since 2012, is understood to have favoured a market-driven privatisation as opposed to one where deals are agreed privately between the political administration and quasi-political investors.

Much to go

The first asset on the block and the one attracting the most attention is 50.08% of Bashneft. Lukoil is regarded as the leading domestic contender. Russia’s Federal Antimonopoly Service has already approved the proposed acquisition.

But Bashneft chief executive Alexander Korsik has muddied the waters by suggesting a secondary public offering (SPO) be offered in parallel to talks with strategic buyers. Korsik’s idea came even while negotiations are underway with the strategic investors.

A Bashneft SPO was being prepared in 2014 but put on hold indefinitely when the company was nationalised following the arrest of its controlling shareholder Vladimir Yevtushenkov.

One idea is for the state to sell up to 12.5% through an SPO, which would double Bashneft’s free float to about 24% of its common stock. That would boost liquidity and expand the company’s investor base, especially if a sponsored global-depositary-receipt programme is run in parallel to the SPO. Bashneft would also be considered a candidate for inclusion in emerging-market and Russian stock indices used as benchmarks.

But an SPO may be non-starter as it would conflict with the proposed change of control.

“The pending ownership change would create a background of uncertainty for an SPO,” says Alexei Kokin, senior oil analyst at UralSib Capital. “A new owner of a 50%-plus-one-share stake of the ordinary shares would be expected to appoint new management, change the dividend policy and possibly take Bashneft private, buying out minority shareholders.”

Furthermore, the investment case for a Bashneft public share sale would hinge on the existing management team, which has succeeded in ramping up oil output as well as paying out an above-average share of net income. Expectations of a pending change will more than likely change that.

“We argue that the government would receive the best value for its shares if it expanded the size of the SPO to 20-30%, avoiding the sale of a controlling stake altogether,” says Kokin. But that looks unlikely.

Bashneft is not the only possible energy asset on the block. A senior source at a Russian state investment bank told PE India’s Oil and Natural Gas Corporation (ONGC) has tabled a bid for at least 10% of Rosneft shares, which would follow other acquisitions ONGC has completed with Rosneft this year. The deal is understood to have been discussed at the highest levels of state. Chinese investors are also thought to be eyeing a stake; though ONGC is in the driving seat and may even expand its offering.

A Rosneft SPO is considered unlikely given the weak performance of Rosneft’s share price following its $10bn London initial public offering in 2006.

If Indian and Chinese strategics baulk at buying a stake in Rosneft, the Kremlin is also considering issuing bonds convertible into shares by Rosneft’s parent company Rosneftegaz. If Rosneft’s share price did not reach the conversion price level within the bond’s five-year tenure, there would be no conversion and, effectively, no privatisation.

Transneft, the oil pipeline monopoly, and RusHydro, the state-owned power utility, are also listed as potential candidates for privatization. But they won’t be deemed sufficiently attractive until sanctions are lifted and energy prices rebound.

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