Russia’s Rosneft to be allowed into privatisation of Bashneft

By bne IntelliNews October 3, 2016

Russia’s state-controlled Rosneft will not be barred from participating in the privatisation of a the lucrative Bashneft oil asset, Vedomosti daily reported on October 3, citing Deputy Prime Minister Igor Shuvalov.

The cash-strapped government had originally been due to privatise Bashneft by September 30, but discussion on whether to allow the country’s largest oil company Rosneft to bid for the company forced a postponement of the sale.

Following the reports that Rosneft’s privatisation bid is likely to be approved, ordinary shares of Bashneft jumped by 8.83% to RUB3,399 per share in early trading on the Moscow Exchange on October 3, while preferred stock added 4% to RUB1,943 per share.

Rosneft got the green light to bid following “Very strong pressure from Igor Sechin”, an unnamed source in the government told the daily, referring to the head of Rosneft and close ally of Russian President Vladimir Putin.

Rosneft, itself due for further privatisation under the current government plans, would consolidate over 50% in Russia’s crude output with the addition of Bashneft. Rosneft argued that its subsequent privatisation as a merged company would bring the highest yield for the federal budget, while still keeping the company under state control.

Rosneft is currently ready to bid $5bn for Bashneft, promising a total gain of up to RUB1 trillion ($16bn) for the state after privatising 19.5% of itself post-merger. The closest contender in the privatisation of Bashneft is Russia’s second-largest oil company, the independent Lukoil, is reportedly not ready to outbid Rosneft, according to Vedomosti sources.

“There appears to be a dearth of potential buyers, since Lukoil (LKOH RX – Buy) has emerged as the only realistic potential competitor to Rosneft,” UralSib Capital commented on October 3. It also noted that Lukoil’s CEO Vagit Alekperov is wary of overpaying for Bashneft as the continuing tax manoeuvring for the oil sector being mulled by the government is reducing downstream profitability.

Meanwhile, the government is wary of “passing the same money around” in a deal where one state company buys another, and will accordingly prohibit Rosneft from using state banks or any other state funding sources for acquiring Bashneft.

“In reality this is a way to extract badly needed money to cover the budget deficit from Rosneft,” another unnamed official told the daily, reminding that previously Rosneft did not comply with a requirement to pay 50% of IFRS net profit in dividends due to a complicated ownership scheme through Rosneftegas holding.

Gazprombank also commented on October 3 that a joint Rosneft and Bashneft deal, if carried out in 2016, is indeed expected to cut the budget deficit by RUB700-RUB800bn, and help stretch Reserve Fund spending by keeping another RUB300bn in the rainy day fund.

The positive fiscal effects would also relieve the central bank’s efforts to “absorb additional liquidity coming from the budget”, Gazprombank analysts add. However, they  warn that the deal is a one-off gain that does not advance a broader privatisation framework to support state revenues also in 2017-2019.

Many questions remain about the form the corporate structure of Bashneft, based in Russia’s republic of Bashkortostan, will take after the sale.

“It is possible, due to the 25% stake Bashkortostan owns in Bashneft, that the company will keep operating as a separate business, distributing profits to shareholders via dividends,” UralSib suggests.

Another possibility is that minority shareholders will be bought out at a premium of about 20% to the current price, but the analysts are concerned with the risks of a management change and “a less generous dividend policy” carrying risks for minorities.

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