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M&A October 2012

According to the Russian press on 1 November 2012, the planned road show for the sale of the state’s 20 per cent interest in Novorossiysk Commercial Sea Port did not happen. This is due to a change of heart at the government, with First Deputy Prime Minister Igor Shuvalov now proposing the sale of the interest to a strategic investor, with a premium on the market price.

Investment banks claim that such a decision could adversely affect port operations and also reduce interest in the privatisation programme scheduled for 2013.

The port is 50.1 per cent controlled by a JV owned by Summa co-owner Ziyavudin Magomedov and Transneft. Shuvalov cited Summa as a potential strategic investor, and also Universal Cargo Logistics Holding, owned by Vladimir Lisin.

According to reports in the media, the Sistema holding company is on the verge of closing a deal to acquire 100 per cent of Rotterdam-based Argos Group, an independent group in the downstream oil market in Europe, subject to the results of a due diligence.

Argos Group was founded a year ago from a merger of North Sea Group and Argos Oil. It has estimated revenues of approximately USD 14 billion a year.

Sistema already has exposure to the oil business through its ownership of Bashkortostan-based Bashneft and Russneft. The deal could generate synergies for Sistema, as it could subsequently export oil to Europe through Argos, thereby cutting out intermediaries.

According to Russian business daily Kommersant (31 October 2012), Rosneft has received the approval of the Federal Antimonopoly Service to increase its interest in National Oil Consortium from 20 per cent at present to 40 per cent, by acquiring the share held by Surgutneftegaz for an estimated USD 200 million. The consortium is developing the Hunin-2 deposit in Venezuela.

Until now Rosneft’s attempts to buy the interest had been hindered by another participant TNK-BP. Of course soon Rosneft will own 60 per cent of National Oil Consortium on completion of the acquisition of TNK-BP for AAR Consortium and BP.

According to Russian business daily Kommersant (25 October 2012), Germany’s Metro Group has found three possible buyers for its 18 Real hypermarkets in Russia – Auchan, O’Key and Lenta.

Metro is seeking up to USD 600 million for the hypermarkets, which generated total revenues of USD 900 million in 2011 and have debts of approximately USD 300 million.

 

According to Russian business daily Kommersant (26 October 2012), the government has now decided to sell 5 per cent of Russian Railways through the private placement of a shareholding in 2013.

Back in June the government had announced plans to sell 25 per cent of the state railway operator, only to backtrack following opposition to the move from the management of Russian Railways. The Ministry for the Economy still hopes that the sale of such a small interest will make the company more transparent and provide some insight as to the valuation of 100 per cent of the rail operator.

However, this would appear hard to do based on the sale of such a small interest and the risk of subsequent share dilution in the event of any further share issues. At the same time, this move may help to clarify the core functions of the rail operator going forward – at present Russian Railways is involved in both infrastructure development for the railway sector and also passenger and freight operator.

As reported by UNCTAD (United Nations Conference on Trade and Development) on 23 October 2012, foreign direct investments into Russia contracted by 39 per cent in the first half of 2012 to USD 16 billion compared to the same period in 2011.

According to the audit and advisory firm KPMG, globally M&A transactions are down to their lowest level since 2005.

So in the circumstances, the abrupt volte-face of the Kremlin and Russian government to back BP’s exit from TNK-BP and deal with state-controlled oil & gas behemoth Rosneft makes more sense. The Kremlin is desperate for some good news about investment, desperate for someone to praise its attitude to foreign investors. That was not going to happen as long as it allowed BP’s partner in TNK-BP, the AAR Consortium, to constantly undermine one of Russia’s biggest foreign investors and company that has expertise needed by Rosneft.

So now BP can be the figurehead for a campaign to promote investments in Russia and can also be expected to toe the line with Rosneft, as it has a minority interest and needs to build up its reserves.