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Rosneft: Initial Public Offering Or Ostracism?
July 3, 2006 17:55


Russian oil giant Rosneft set up after the break-up of Yukos has initiated its IPO both in Russia and London. The company is one of the world's largest oil firms and Rosneft made a net profit of $802m in the first quarter of 2006. It holds most of its assets in western Siberia and around the Sakhalin Island area, where ExxonMobil and Shell are active.

The valuation was set at between $60 billion and $80 billion, at the high end of expectations. The four lead banks in the deal are ABN AMRO, JP Morgan, Morgan Stanley and Dresdner Kleinwort Wasserstein. Rosneft has given a commitment to place its equity at between $5.85 and $7.85 per share and intends to raise up to $11 billion in the dual share sale of a 13-19% stake in London and Moscow.

The shares will be formally priced on July 13 and traded only six days later. Rosneft also indicated that investors would be limited to a maximum stake of 2 per cent in the company

The deal has been divided into two with an offering of old shares in Rosneft's parent company, Rosneftegaz, and a second part offering 400m new shares in global depository receipts.

ONGC, India’s state energy company, said yesterday that it was considering taking a stake, while China’s CNPC and Sinopec may also make an investment.

It is strange, though, why the company said that only leading institutional investors were to receive the launch document and it was not being published on its website.

Widespread concerns
To start with, banks’ assessments of Rosneft’s value have ranged from as low as $35 billion to as high as $120 billion, showing the gulf between doubters and believers in the IPO, London’s biggest this year. Many doubt the valuation proposed by Rosneft, since it is bigger than the worth of Russia’s largest oil company, LUKOIL.

"The question is why get Rosneft when I have Lukoil. If the price comes down we might look at it," said Mark Mobius, one of the world's biggest emerging market players, who manages $30bn of assets for Templeton.

Steven Pearlstein, business columnist at The Washington Post, compares the 500 page prospectus to the IPO to a “comic relief” and the IPO itself to a “sucker bet”. He calls the company a “financial house of cards” and mocks those “gullible enough to believe that Russia can now be trusted as a reliable business partner”.

The Times Carl Mortished cites the prospectus focusing on the most controversial points:

  • Rosneft has potential legal liabilities of up to $14.7 billion resulting from Yukos-related lawsuits.

  • Rosneft had “certain material weaknesses” in its internal controls, as well as corporate governance issues stemming from the Russian Government’s control of Rosneft.

  • Rosneft could “engage in business practices that do not maximise shareholder value”.

The Financial Times points out Rosneft’s large reserves and central position in the country's new energy landscape but puts forward morality issues.

The Guardian’s takes up the topic. Nils Pratley says it’s a “glorified sale of stolen property, in which some of London's leading investment bankers, lawyers and PR folk will pocket about £100m”.

“Stolen”, because its main operating arm, Yuganskneftegaz, was acquired in a “forced auction controlled by the Russian government”, and some time ago Yukos sent a request to the British Financial Services Authority to halt the IPO.

The journalist also believes Rosneft doesn't remotely resemble a western company in terms of corporate governance and suggests that its outlook is vague.

The Daily Telegraph says American billionaire George Soros has called on fellow investors to boycott the Rosneft offering.

At the same time, Peter O'Brien, Rosneft's vice-president, said: "I think there is potential litigation risk… So far, whether it's the United States or the UK or in Russian courts, we're confident that the outcome … will be consistent with what has happened in the past."

Rosneft's president, Sergey Bogdanchikov, said a series of recent court cases brought by Yukos had gone its way. "We believe the whole issue of the Yuganskneftegas purchase is closed," he said.

Economy or politics?

Very often the West portrays Russian oligarchs as saints but forgets to mention ways they used to gross their fortunes. A BBC article on the matter offers a glimpse into the rags-to-riches path: news.bbc.co.uk/2/hi/business/3927523.stm.

The timing of the IPO was obviously to coincide with the G8 summit in St. Petersburg where play will play the role of the chairman and the host. It might have trapped itself for the volume of criticism, justified or false, is increasing as it gets closer to the event.

Economic issues are often used to bully other countries. It’s not only Russia that, as the West claims, engages in gas blackmailing. It is also other countries that would hate Russia’s arrival on the international economic arena and are trying to impede its expansion. Take Arcelor, for example, that chose Mittal Steel at the last point or the UK which was strongly against Russia’s Gazprom deal with Centrica.

Russia has a chance to succeed in the world and play one of the leading roles. Why can’t it use its resources for that, just like other countries did. No-one recalls how the United States amassed their political and economic wealth benefiting on post-war Europe. No-one dares to say it was largely its nuclear missiles that made it a superpower.

So the reason for criticism might and should lie outside of politics. Russia-IC urges you to read news between the lines, taking both criticism and boasting with a pinch of salt.

 


Tags: Russian oil and gas industry     

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