Moscow — Russia has agreed to sell a 19.5% stake in Rosneft for Eur10.5 billion ($11.3 billion) to a consortium of the Qatar Investment Authority and trader Glencore in a major boost for Moscow as it looks to sidestep the impact of Western sanctions.
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Under the surprise move announced late Wednesday, the Russian state will retain a controlling 50% share of the country's top crude producer, President Vladimir Putin said in a televised meeting with Rosneft CEO Igor Sechin.
Glencore will pay Eur300 million under the deal, in return for a 0.54% equity stake in Rosneft and the right to offtake 220,000 b/d of Rosneft's crude for the next five years, the trading giant said in a separate statement.
The balance of the funding for the stake of Eur10.2 billion will come from the Qatar Investment Authority (QIA), which is also a Glencore shareholder, and non-recourse bank financing, Glencore said.
Glencore referred to the terms of the deal as proposals, however, saying it was in still "final-stage negotiations" for the Rosneft stake with Qatar.
"Certain things can be altered in the process," including the final share distribution between Glencore and QIA, Rosneft's spokesman Mikhail Leontiev said, adding that it is possible the two will split the stake in half to hold 9.75% each.
Glencore in its statement also indicated there is scope for change, saying the transaction is conditional on financing finalization, guarantees and other agreements by mid-December.
WHAT'S IN IT FOR GLENCORE, QATAR?
The sale came as a major surprise to the market as it had been expected Rosneft would likely buy its own shares in the absence of major international investors due to sanctions on the company by Western countries.
"It was unexpected for all to see that given the current market and the sanctions someone is ready to pay $11 billion for [a stake in] Rosneft," said Andrey Polishchuk, analyst at Raiffeisenbank.
The deal also envisages setting up a joint upstream enterprise between the three to work on Russian and international projects and a long-term supply contract with Glencore, Sechin told Putin during the meeting.
"The deal is not just a portfolio investment, but is of a strategic nature and has additional elements such as signing a long-term supply contract with Glencore, agreeing the market positions as a result of this work, as well as creating a separate upstream enterprise," Putin said.
The terms also include "strategic partnership for further cooperation, including infrastructure, logistics and global trading" with the trader, said Glencore, which also holds 25% in Russneft, a smaller Russian crude producer.
The deal will represent a 10% boost to Glencore's growing crude trading business which handled volumes of around 2.15 million b/d of during the first half of 2016, according to company reports.
It will also help it close the gap to trading rival Trafigura, which is one of the biggest marketers of Russian oil following a string of pre-pay oil deals with Rosneft in the wake of US and EU sanctions on Moscow and its key businesses in 2014.
A spokesman for Geneva-based Glencore declined to comment on whether the deal could fall foul of ongoing financial sanctions on Rosneft, but noted the "limited liability, fully ring-fenced" structure of the proposed deal.
In its statement, Glencore said the risks of the planned deal would be "fully indemnified by appropriate financial institutions."
The spokesman also declined to comment on whether the deal could attract the attention of EU competition regulators but said the consortium will "comply with all relevant regulations."
A Rosneft stake would broaden Glencore's opportunities to become a major Urals crude trader and expand its upstream portfolio, analysts said.
"Glencore probably counts on becoming Rosneft's partner as a trader, perhaps participating in certain projects, including upstream," Polishchuk said, adding that he expects Glencore to secure a loan and bring its share up to 9.75%.
A Glencore spokesman told Platts, however, that under the current proposal, Qatar's investment makes up almost all of the total value of the deal.
Qatar, on the other hand, is more of a portfolio investor, which has enough of its own projects, and most likely it intends to resell its stake later on at a higher price, Polishchuk said.
"It is not ruled out that this is an intermediate deal, and a part of the stake or the whole stake may be later resold to other strategic partners such as those in China or India or both," he said.
Some Asian investors, including from China, India and Japan, were previously said to be interested in the deal.
In its search for investors, Rosneft had held talks with more than 30 companies, funds, professional investors, sovereign funds and financial institutions in Europe, America, the Middle East and Asia Pacific, before choosing the two partners, Sechin said.
The deal follows another privatization deal which saw Rosneft buying 50% in Russian producer Bashneft for Rb329.69 billion ($5.29 billion) in October. That deal raised Rosneft's Russian oil market share to about 40%.
Putin congratulated Sechin on both deals, some of the largest in the oil market, saying the timing for both was "lucky."
Rosneft's stake sale is "a very good result," as the deal took place at a time of rising oil prices, which is reflected in the company's value, Putin said.
"I very much count on the entry of the two investors... into [Rosneft's] management improving corporate procedures, the company's transparency, and accordingly, will eventually lead to capitalization growth," Putin added.
Rosneft was marked for privatization alongside other large state-owned companies at the start of the year, with the deal expected to be completed and the funds entering the state budget by December 15.
Rosneft was due to announce its privatization plan by December 5 but missed the deadline, stoking expectations that the company would buy back the shares held by state holding company Rosneftegas, especially after Rosneft issued Rb600 billion in bonds earlier this week.
"The market was pleasantly surprised by the news. The buyback of the 19.5% Rosneftegas stake by Rosneft was considered the base-case privatization scenario," especially after the bond placement, Aton analysts said in a note.
Having more foreign shareholders in the company "should positively affect its corporate governance, and facilitate boosting its market cap," they said, adding that a partnership with Glencore could create additional value down the road.
Rosneft can now redirect that money for company development and paying off debt, especially given that it has a $12.9 billion loan due in 2018, said Polishchuk.
"From Rosneft's point of view the deal is superb. It now doesn't need to buy its own stake, spending big money on that. It really needs that $11 billion, both to finance the investment program and pay off debt in the future," he said.
"Rosneft will most likely continue its strategy of becoming larger, more international and more profitable," he said.
Analysts at Sberbank also said that, similarly to BP which has a 19.75% stake in the Russian company, they do not expect Glencore and QIA to stand in Rosneft's way too much.
"They will hardly oppose the implementation of large-scale projects or acquisitions suggested by management, although they may act as advisers," Sberbank said.
The sale was valued above the governmental guidance on a minimum price for the stake of Rb710.8 billion, but still came "with the minimal possible discount" of 5% to Tuesday's stock value, Sechin said.
He estimated the company's market capitalization rising by Rb80 billion as a result of the deal.
Rosneft's shares on the Moscow exchange, where around 10% of the company is freely traded, shot up by more than 6% from Wednesday's closing price to a high of Rb380.95/share ($5.98/share). This is nearly 10% above the sale share price of $5.45/share, according to Sberbank.
Whether the consortium, which is a 50:50 split between Glencore and QIA, will get on Rosneft's board of directors is to be agreed when the deal closes in a week, Rosneft's spokesman said.
BP has two representatives on the nine-person Rosneft board of directors.
Glencore declined to comment on its board of directors membership.
Russia's Federal Anti-Monopoly Service said Thursday it does not require the deal to be reviewed and that Rosneft need only inform the regulator of the completion of the deal.
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Look out for our related Snapshot video on Monday, 12 December