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Rosneft's offer to TNK-BP minorities may put an end to spat

The Russian oil major has made a decision to buy out minority stakeholders in TNK-BP

Rosneft's decision to buy out minority shareholders in the recently acquired TNK-BP may put an end to a spat that was proving to be yet another stain on Russia's investment reputation, though the terms of the deal will do little improve it among investors.

On 30 September, Rosneft confirmed earlier comments by its chief executive Igor Sechin that the Russian oil major would, after all, buy up the remaining shares in the TNK-BP venture that it hadn't acquired from a group of a group of oligarchs in a $55-billion takeover.

Rosneft completed its acquisition of 100% of TNK-BP earlier this year, which created the world's largest publicly traded oil company by output. But the deal left minority shareholders in the publically traded TNK-BP Holding (now called RN Holding), in which TNK-BP held 95% and minorities 5%, in limbo. Until 27 September, Sechin had repeatedly stated that because Rosneft was not legally obliged to buy out the minority shareholders, he had no intention of doing so. The Russian state-controlled major was not a "charity fund" he bluntly put it in April.

However, at an investment conference in Sochi on 27 September, Russian Prime Minister Dmitry Medvedev urged Sechin to agree to buy out the minority shareholders in RN Holding, arguing the dispute was damaging Russia and Rosneft's reputation with international investors, exactly at a time when the country is in desperate need of attracting more investment. According to reports, Sechin said the company would "voluntarily...  fulfil the task".

"As the situation with TNK-BP Holding has cast a shadow on Rosneft's corporate governance and damaged Russia's reputation among investors - it has become clear that a buyout would perhaps be a preferable outcome for all involved, prompting Sechin's U-turn," said IHS Global Insight.

Thus the following Monday, Rosneft announced its board of directors had approved the buyout of RN Holding's remaining shareholders and set a price of 67 roubles ($2.00) per ordinary share and 55 roubles per share for preferred shares, meaning the company would pay out a total of $1.5bn for the outstanding shares.

The price was at a premium to the previous Friday's closing price for RN Holding shares of 60.38 roubles, which itself was up 11.8% on the day after Sechin's remarks, though the offer remained far short of the $3.70 per share that analysts have calculated the TNK-BP oligarchs - who included Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik - received at the time of the TNK-BP buyout.

"Minority shareholders who accept the offer will receive just half of the price for their shares that the oligarchs and the big foreign major [BP] got for theirs," Sberbank CIB said in note. "The only shareholders who will benefit from this are speculators who bought the shares on the cheap during the long period of uncertainty."

It's not as if Rosneft will do badly out of the buyout. Artem Kvas, an analyst with Renaissance Capital, says the deal will grow the company's earnings while also being good for corporate governance, which in the longer term will result in generally lower cost of capital and higher valuations. "Rosneft will benefit from the buyout because it will be earnings accretive (20-30%). In addition, we estimate additional $300m in a one-off effect to Rosneft net earnings due to full consolidation of TNK-BP which will imply an additional 2.2% to the company's dividends," he said in a note.

Furthermore, it appears that Rosneft did well in the deal that secured TNK-BP in the first place. At the same conference that he acceded to the buyout of minority shareholders, Sechin told delegates that an independent appraiser, Deloitte, had estimated TNK-BP's fair value at 1.9 trillion roubles, which is 167bn roubles above the price paid by Rosneft. According to Sechin, the $5.2bn excess fair value over the price paid for TNK-BP will probably be reflected in the third-quarter earnings report.

The upshot, say analysts, is that the delay in buying the minority shareholders out plus the grudging terms has dealt a blow not only to Russia's investment climate, but also that of Rosneft, which has been busy trying to convince everyone that its history as a Kremlin vehicle that was the prime beneficiary of the forced bankruptcy of Mikhail Khodorkovsky's Yukos is behind it.

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