Russia to Pay $7.13 Billion to Win Control of Gazprom (Update4)

Bloomberg
June 16 2005

June 16 (Bloomberg) — OAO Gazprom, the world’s largest natural-gas
producer, said Russia will pay 203.5 billion rubles ($7.13 billion)
to gain direct control of the company, as President Vladimir Putin
seeks greater state involvement in the nation’s energy industry.

The board of the Moscow-based company approved the government-
recommended price at a meeting today, Gazprom said in an e-mailed
statement. The 10.7 percent stake in the company will add to the
government’s current direct holding of 39.4 percent.

Gaining majority control of the company is a precondition for Putin
to deliver on a 2003 pledge to end limits on foreign ownership of
Gazprom’s domestic shares. Putin wants to lure back some of the $9.5
billion pulled from Russia last year after the dismantlement of OAO
Yukos Oil Co.

“It’s marginally on the wrong side of the line,” said Chris Weafer,
chief strategist at Moscow-based Alfa bank, in a telephone interview.
“This may compound existing concerns that many of Gazprom’s strategies
have more of a political angle than a business angle.” Alfa Bank
estimated the stake to be worth $10 billion, he said.

Russian economic growth is cooling for a second year after business
confidence suffered in 2003 and 2004 from the probe into Yukos and
its former chief executive, Mikhail Khodorkovsky, who was sentenced
to nine years in prison last month. The central bank expects net
capital outflows of $7 billion this year and next amid concern about
property rights.

$2.80 a Share

The government will pay 80.04 rubles a share, or $2.80, according to
the price and number of shares listed in Gazprom’s statement. The
average price of the company’s domestic stock was 79.52 rubles in
April and May, according to Bloomberg data.

A 10.7 percent stake is worth $7.4 billion in Moscow at today’s
close, or $8.9 billion based on the company’s depositary receipts,
which account for about 10 percent of the company’s capital and are
the only way foreigners can directly trade Gazprom shares.

The local shares rose 0.6 percent today to 83.44 rubles in Moscow.
Gazprom depositary receipts, equal to 10 domestic shares, declined
0.1 percent to $35.10.

Gazprom didn’t say how or when OAO Rosneftegaz, a company set up
by the government last year, will pay for the stake. Spokesman Igor
Volobuyev referred questions pertaining to payment to the government.

Boris Fyodorov, a Gazprom director, said today the company would
receive cash for the shares by the end of this year, Interfax reported.

Loans, Then IPO

Rosneftegaz will take out loans to acquire the stake, and Russia
will later sell shares in state oil company OAO Rosneft in an initial
public offering to pay back the money, the Economy Ministry said in
a statement on May 17. Following the transactions, the Russian state
will own the majority of both Gazprom and Rosneft, all of whose shares
were transferred to Rosneftegaz.

Rosneftegaz’s board today approved the purchase and will take
possession of the shares on schedule, by June 24, the Federal Property
Agency said. Gazprom’s annual meeting is that day.

Gazprom intends to use the cash raised from the stake sale to buy
assets in Russia and abroad, focusing on the oil, gas and power
industries, Chief Executive Alexei Miller said yesterday in St.
Petersburg. He declined to comment on what assets or regions the
company is interested in.

“If there are reserves there, we are interested,” Miller said.

Sakhalin Bids

Gazprom may bid for a stake in Rosneft’s Sakhalin-1 gas field and
the Sakhalin-3 gas project, Gazprom Deputy Chief Executive Alexander
Medvedev said June 10.

Deutsche Bank AG, Europe’s third-biggest bank, in November
recommended Gazprom buy Yuganskneftegaz, OAO Surgutneftegaz, Russia’s
fourth-largest oil company, and OAO Sibneft, which is controlled by
Roman Abramovich, the Russian billionaire now living in London.

Chief Financial Officer Andrei Kruglov said Gazprom may also scale
down its plan to borrow 110 billion rubles ($3.8 billion) this year,
depending on how fast it gets cash from the sale and European gas
prices, Vedomosti reported.

Gazprom, which has borrowed 40 billion rubles so far this year,
plans to sell domestic bonds in July and won’t sell Eurobonds before
September, Kruglov told the newspaper. Asian investors, such as
Singapore’s state investment agency, are showing strong interest in
Gazprom, he said.

The company, Russia’s largest by market value, pumps enough natural
gas a year to supply 80 percent of U.S. consumption. The board,
which was scheduled to approve the stake sale yesterday, postponed
the decision until today because the government’s instructions to
its board representatives had not been signed.

Gazprom Chief Executive Alexei Miller was not present at today’s
board meeting because he travelled to Yerevan to meet with Armenian
president Robert Kocharian. He voted in writing and the board decision
was legitimate, Volobuyev said.

Morgan Stanley valued Gazprom at $78.1 billion to $92.3 billion,
Russia’s Federal Property Agency said May 30. Dresdner Kleinwort
Wasserstein put Gazprom’s worth at between $93.3 billion and $107.0
billion.