Russian oil giant Rosneft has made a $5bn acquisition offer to the government in its efforts to be allowed to buy a controlling stake in the Bashneft oil company despite Kremlin opposition, Bloomberg reported on August 29, citing unnamed senior officials.

As bne IntelliNews suggested on August 25, the unexpected postponement of Bashneft's privatisation could see a lucrative switcharound of assets and cash enabling the government to halve this year's budget deficit: this would entail the sale of Bashneft to Rosneft, thereby increasing the latter's value, followed by the privatisation of 19.5% in Rosneft.

The result of the manouevre could be larger than the sum of the parts, given the higher value of Rosneft capitalising on Bashneft's extraction assets and around a 10% premium of $5bn included in Rosneft's bid for the stake.

According to Bloomberg, the 19.5% stake in Rosneft could generate about $11bn, making a total gain of $16bn for the cash-strapped government. Along with sales of other state-controlled assets, Bashneft's privatisation was intended to darn holes in the budget caused by a slump in oil prices and Western sanctions imposed over the country's actions in Ukraine.

Reportedly, Rosneft head Igor Sechin, a longtime ally of President Vladimir Putin, suggested that the government allows the state-run company participate in the deal. Sechin reportedly cemented his claims with a study commissioned from Italian bank Intesa Sanpolo Spa, which found that Russia could earn at least $11bn selling the 19.5% in Rosneft shares to funds and trading companies in bundles no bigger than 5%.

Such a privatisation option would alleviate the concerns of some officials about selling to China, India, or both, which was being seriously considered, one quoted source said.

Government officials had strongly opposed the idea of state-run Rosneft participating in the sale of state-run Bashneft, arguing that it would be shuffling the same money around and would hurt the investment climate by strengthening the role of the state in the economy.

But the government's abrupt postponement of Bashneft privatisation on August 16 and previous mixed messages from the Kremlin showed that the issue was still undecided, with political infighting evidently underway behind the scenes.

Long game

Rosneft's shadow was already hanging over Bashneft in 2011 when the state behemoth was reportedly competing for the major Trebs and Titov oil fields, auctioned to a joint venture of Bashneft and Lukoil.

In 2013, after acquiring Russia's third largest oil producer TNK-BP for $44.4bn in cash and 12.84% of its own shares, Rosneft was said to be moving on Bashneft next.

Despite the reported sending of more than 50 invitations to buy into the company to foreign oil majors, sovereign wealth funds, and the usual band of industrial tycoons, all four leading bidders so far appear to be domestic: state-controlled Rosneft, independent oil major Lukoil, and lesser-known players NNK and Antipinsky Oil Refinery.

Russia's second-largest oil producer Lukoil already has common extraction projects with Bashneft and can benefit from strong synergies with the company. On the other hand, should Rosneft take hold of the company, it would control over 50% of Russia’s crude extraction.

Aton Equity estimated 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 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 government.

The strong interest in Bashneft is not accidental as it is one of the most attractive assets in the oil and gas sector, steadily increasing output despite the decline in oil prices seen since 2015.

Even despite the recent rally on Bashneft shares due to privatisation talks, Gazprombank in June argued that the valuation is justifiable, with the company being "probably the best [acquisition] target in the Russian oil and gas sector".

But while the government and Russia's State Property Fund supposedly determine who can and cannot participate in the sale, all developments are said to depend on a nod from the Kremlin, the true seat of Russian power. "There's a line from here [in government] to the Kremlin to buy Bashneft," a person familiar with the privatisation process told The Financial Times on July 27.

Attractive asset

The company remains attractive despite its turbulent recent history. Bashneft was privatised in the early 2000s by AFK Sistema by consolidating oil and gas assets of Russia's Republic of Bashkortostan, and was effectively renationalised in 2014 by court order after Sistema chief Vladimir Yevtushenkov was placed under house arrest.

As the controversial case of re-nationalisation was unfolding, many commentators feared that extracting Bashneft from Sistema was the new "Yukos case", referring to the jailing of oligarch Mikhail Khodorkovsky and the ensuing firesale of the company's assets, said to have been orchestrated by Sechin and marking the rise of Rosneft's domination of the sector.

Meanwhile, the sale of 25% minus one share in state-owned Russian maritime shipping agency Sovcomflot will be postponed to 2017, Vedomosti daily reported on August 29, citing federal government sources.