Russian oil giant Rosneft announced agreements with both BP and AAR on October 22 to acquire their stakes in TNK-BP. The deals, worth a combined $55bn, will hand the state-controlled company 100% of the joint venture - Russia's third largest producer - to make it the largest publicly traded oil company in the world.
Under its deal, BP will sell its stake for $17.1bn in cash plus a 12.84% stake in Rosneft in the form of treasury shares. The British-based energy major has also agreed to purchase an additional 5.66% stake in Rosneft from state holding Rosneftegaz at $8/share. Rosneftegaz has until December 3 to accept the offer, which would leave BP with a total stake of 19.75% in Rosneft, including an existing stake of 1.25%.
Meanwhile, Rosneft also has agreed terms with BP's Russian partner, the consortium of oligarchs under the umbrella AAR, for its 50% in TNK-BP. AAR had previously said it would not partner Rosneft in the JV. The state giant will hand over $28bn in cash for the stake. Rosneft insisted in a statement that the deal is "entirely independent of the transaction with BP." AAR confirmed that a memorandum of understanding has been signed, but added that it is still subject to other conditions, reports AP
To finance the purchases Rosneft may take out loans from Western banks, sell non-core assets, and issue bonds, CEO Igor Sechin said. The former energy Tsar claimed that Rosneft's credit rating is not likely to suffer, despite the sizable loans the company intends to take on, and that the deal will see the company eventually improve its financial and economic performance.
Rosneft may finalize the transactions within six months, he added. "Regarding leverage, the BP and AAR deal will result in a net debt/EBITDA of 1.8-1.9, including 100% of TNK-BP, which is still affordable," analysts at UralSib wrote in a note.
The deal will make it the world's largest publicly traded oil company, with higher crude production than global energy titans Exxon Mobil and Royal Dutch Shell. It also offers Sechin a boost as he fights the liberal-led cabinet over his plan to continue the expansion of state holding Rosneftegaz by buying stakes in utilities companies. His old friend President Vladimir Putin offered him public congratulations on the deal when it was announced.
"This is a good big deal which is important not only for Russia's energy sector but for the entire Russian economy," Putin said in remarks carried by Russian television. Sechin, formerly a deputy prime minister, lost ground last year when AAR blocked a planned $16bn tie up between Rosneft and BP, causing Putin clear discomfort after he publically backed the plan.
Analysts welcomed the deal, calling the acquisition of first-class assets at a fair price "beneficial" for Rosneft, while hoping that the British company can bring its expertise and influcence to bear on the Russian giant's corporate governance.
BP's 20% stake and two seats on the Rosneft's 9-seat board is the best of all scenarios discussed in the media, suggests UralSib. "We hope BP's BoD role will prevent Rosneft from unjustified capex and acquisitions. The ultimate degree of BP's influence on management is still unclear, but we expect BP to offer its expertise in preventing a decline in production at mature fields from 2013."
Further than that, the deal appears to offer both the JV and BP a favourable outcome to the long-winded battles with AAR. "The old shareholder conflict between AAR and BP is over now," they note. "The deal will also reverse BP's earlier failure to team up with Rosneft in an exploration deal in the Arctic and secures the company's access to Russia's crude reserves, which account for a quarter of BP's reserves."
Shareholders of TNK-BP Holding - the holding company of the JV - are likely losers however, given the potential for a significant change in dividend policy. AAR's oligarchs had been pushing a high payout over the years, but Rosneft is clearly going to need to hold back cash to pay down debt, and will likely push capital expenditure also.
"We believe that TNK-BP Holding shares will eventually be bought from the market, since their value will reflect only part of the evaluation of the new parent company - Rosneft - which will not be obliged to make a mandatory offer to TNK-BP Holding minority shareholders," Sergey Vakhrameev from Metropol writes.
As for the wider oil sector, analysts now expect a new M&A wave amidst ongoing consolidation. Private companies such as Lukoil and Surgutneftegas will have to focus more on value through higher corporate governance standards as competitive pressure from state-owned players will grow, analysts suggest.
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