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Royal Dutch Shell Plc .com: Russia’s ‘people’s IPO’ gets off to a good start

From TheBusinessOnline
By Ben Aris In Moscow
09 July 2006

THE People’s IPO appears to have got off to a good start as Russians across the country queued at banks to purchase up to $555-worth (£310, E450) of shares in state-owned oil company Rosneft. Trading in the shares is due to start in London and Moscow this week.

Although the bankers involved in the issue wouldn’t say how much of the $10bn-$14bn the general public had bought, there is little doubt from the length of the queues that sale has proved popular in Russian. Individuals can buy up to $555 worth of shares.

Elsewhere, the success of Rosneft’s IPO remains in doubt. Analysts think the $60bn to $80bn valuation the Kremlin has put on the company is high and some international institutional investors remain spooked by threats from shareholders in Russian oil company Yukos of a “lifetime of litigation”. They claim the bulk of Rosneft’s production – the Yuganskneftegaz company formerly owned by Yukos – were illegally acquired with the connivance of the Kremlin in a bankruptcy auction in 2004.

Rosneft needs to raise at least $8.5bn from the sale to pay back money borrowed on the Kremlin’s behalf last year and used to increase the state’s stake in gas monopolist Gazprom to a clear majority.

Despite this, Rosneft is a tempting investment. It claims to own the world’s largest oil reserves. The IPO is the third largest in history and 10 times larger than Russia’s previous record holder, the $1.5bn IPO of telecoms group Sistema in London last year.

Speculation as to how much was being put up for sale was laid to rest when Prime Minister Mikhail Fradkov said last Wednesday that the government won’t sell more than 14.3% in the company. This would raise $7.9bn at the lower price range ($5.85- $7.85) and $10.64bn at the higher price.

“The lower price would not raise enough to cover the $8.5bn the Kremlin needs to raise to pay off the Gazprom debt,” said one banker involved in the IPO. “The Kremlin is looking to sell the stock in the middle of the price range and is pushing to make this happen.”

Rosneft will have to give away another 11.85% of stock to minority investors after the IPO as part of the company’s consolidation. If the Kremlin wants to keep control of 75% plus one share it can sell no more than 18.5% of the company (13.15% after the consolidation) for at least $7.1 per share, which is also the valuation many analysts feel is fairer.

In recent weeks the Kremlin has been trying to ensure the success of the IPO by putting pressure on international energy companies to take between $500m and $2bn stakes in the company, although strategic investments are capped at 2%.

Among the 15 major energy multinationals invited to participate are: China’s CNPC, Shell, ExxonMobil, Chevron, ENI, Total, Indian’s ONGC, Maylasia’s Petronas, Brazil’s state-owned oil company Petrobras and Britain’s BP.

Talks with Petronas and CNPC are thought to be furthest advanced. Normally, multinational oil companies wouldn’t be interested in a purely financial investment, but Chris Weafer at Alfa Bank says the Kremlin is making these companies an offer they can’t refuse.

“The Kremlin is bartering access to its energy sector in return for help in developing the economy,” says Weafer. “This is a test to see who is a friend of the Kremlin’s and who isn’t.”

BP has the biggest presence in Russia through its joint venture with Tyumen oil (TNK) and initially balked at the high valuation, but Russian business daily Vedomosti reported on Thursday the company had changed its mind.

“BP is prepared to buy Rosneft shares at an above-market price,” the paper said, citing sources in BP.

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