Did Sistema get Bashneft on the cheap?

By bne IntelliNews October 10, 2014

bne -


One of the key arguments of Russia's investigative committee looking into Sistema, is that in 2009 it acquired the Bashkortostan oil sector assets later consolidated into Bashneft  at a significant discount to the market, knowing that they were of illegal origin, thus knowingly acted as a fence for stolen goods.

Last month a Russian court seized Sistema’s Bashneft shares, while  Sistema's controlling shareholder Vladimir Evtushenkov remains under house arrest on money laundering charges.

According to a presentation Sistema published on October 9, this argument is wrong, since Sistema acquired the disputed assets at a premium to the market. According to the presentation, Sistema acquired the assets in three stages - acquiring a minority holding of 19.9% in August 2005 for $502.9m, adding share packets in October 2005 of 2-9% totalling $96.8m in value, and then in April 2009 paying $2bn to take a controlling stake.

This last transaction in April 2009 exceeded the average market evaluation of the shares on the market over the preceding 6 months by 80%, with a 8.5 price to earnings ratio compared to peer companies' ratio at around 5.1, according to Sistema.

According to Aton brokerage, carrying out a historical analysis of Sistema's dealings with Bashneft, Sistema indeed paid a market price for the Bashneft assets. 

Nonetheless questions remain over why Sistema failed to make an additional and final $500m payment it contracted to that would have taken the total acquisition price to $2.5bn. Sistema's decision not to make this final payment and Ural Rakhimov's apparent acceptance of the decision appears to be one of the mainstays of investigators' arguments. 

In May 2009 Sistema announced that it would forgo the $500m because unspecified pre-agreed conditions were not met. Investigators argue that the way that Ural Rakhimov, son of Bashkiria's president, agreed to Sistema dropping the $500m payment suggests he was willing to accept a lower price just to be rid of the potentially troublesome assets.

"While we do not know the nature of the unmet conditions, their presence suggests to us that Sistema realised it was taking on quite a challenge when buying the assets, and tried to safeguard itself in case it later encountered any unexpected operational, financial or regulatory issues," Aton analysts wrote. "Now it appears that this prudent measure and the consequent forgoing of the final $500m payment as a result have returned to haunt them."

Aton agreed with Sistema that the final $2bn payment in itself was at a premium to the market, and put the premium at  59%-80%. But Aton listed one important caveat: "The deal was struck at almost the height of the 2008-09 financial crisis, when the Urals price fell to around $40 per barrel."

"That Sistema acquired the assets at a later stage is purely incidental, and does not make Sistema guilty by association," wrote Aton analysts. "It should not be used to suggest that Sistema, or indeed its controlling shareholder were involved in foul play or benefitted unjustly."

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