The Russian government on August 16 announced it was delaying the sale of its 60.2% stake in oil company Bashneft, and in doing so appeared to wreck any hope of raising the RUB1 trillion from privatisation that would go toward plugging a 3%-plus hole in this year’s federal budget. But it could be part of a clever move, as the mooted auction of a 19.5% stake in state oil company Rosneft that had swallowed Bashneft first could bring in more money than doing these two deals separately. 

The reason given for the Bashneft delay was that the market conditions were not right, but conditions have not been right for a major asset sale since September 2008. Clearly, some political infighting was going on under Russia’s proverbial rug. The state later said that the company would be sold next year and probably after a 19.5% stake in Rosneft had been auctioned off.

The Bashneft stake was assessed to be worth a bit more than RUB300bn ($4.6bn) by Ernst & Young, while the Rosneft stake is worth some RUB650bn ($10bn) at its current share price.

The fly in the ointment in the Bashneft sale seems to be Rosneft. While the government has technically banned state-owned companies from participating in any privatisation that would effectively move a company from one pocket to another in the same jacket, Rosneft in its empire-building ambitions has argued that it not subject to the ban, as the state controls the company indirectly via the Rosneftegaz holding. Rosneft CEO Igor Sechin made it clear he was still intent on bidding for the stake despite an explicit order by President Vladimir Putin that Rosneft should stay out.

Other than this problem, the auction was well set up, with another nine Russian companies in the running (no foreign company intended to participate). Privately owned Lukoil was the front runner.  “This stellar privatisation asset had been perfectly prepared for sale with ten bidders waiting in the queue. We do not understand the logic of this decision [to cancel] and see only negative consequences, “Alexander Kornilov, an analyst with Aton Capital, wrote in a recent note. “This is major negative news for Russia’s fiscal budget with privatisation a pivotal source of income, and the decision on Bashneft challenges the Rosneft deal this year.”

It seems that there was not enough time to resolve the role that Rosneft was going to play in the auction, but the delay raises an interesting new possibility.

Better together

One option that remains open is to sell Bashneft to Rosneft and then auction off Rosneft’s 19.5% stake after – the reverse order to the current plan.

Given analysts believe that the synergies to be gained between Rosneft and Bashneft are better than those to be gained by a Lukoil-Bashneft tie-up, the 19.5% Rosneft stake valuation post a Bashneft takeover could be worth more than the combined value of selling the two stakes individually. The whole being greater than the sum of its parts, basically.

“We think that selling Bashneft to Rosneft and then privatising Rosneft would be the optimal option for the state – not doing so, the state loses a $2.6bn industry synergy and an opportunity to boost Rosneft’s value ahead of its sale, thus maximising its privatisation return,” speculates Kornilov.

On an EV/Ebitda and price/earnnings basis, Rosneft has been trading at a premium to other Russian oil companies for the past three-to-five years. Therefore, combining Rosneft with Bashneft and the subsequent sale of Rosneft’s 19.5% stake would essentially kill two birds with one stone: it would accomplish two deals while maximising the government’s return and industrial synergy, Aton argues.

Aton estimates Rosneft’s synergies from the Bashneft deal at $2.6bn versus $1.9bn for a tie-up with Lukoil. What makes the difference is that Rosneft would gain access to Bashneft’s refining cluster, which Aton believes will allow Rosneft to earn higher incremental downstream Ebitda. All of this also means that Rosneft might be persuaded to pay a premium for the Bashneft stake over the current starting price of about RUB300bn, which would represent an immediate cash windfall for the cash-strapped Russian government.