Gazprom and SUEK Reach Merger Deal

Energy majors Gazprom and SUEK said Tuesday that they had agreed on the main terms for merging their power and coal assets into a holding company that would eventually sell shares to the public.

Analysts said the joint venture would create a giant that would partly remonopolize the sector, undermining the liberal reforms aimed at making it more open and competitive since 2003.

The two companies said, however, that they were following "English" standards of transparency.

"In the future, the companies plan to hold a global international initial public offering," they said in a statement.

The statement gave no value for the holding company, but sources close to the merger said it would be worth $15 billion to $16 billion.

Analysts said the figure was realistic but were surprised by the plans to list the company, saying it could create a new bellwether for the sector.

Their main reaction, however, was one of concern over the market dominance and lobbying power that Gazprom-SUEK would enjoy.

"Of course this worries us," said Alexander Kornilov, senior analyst at Alfa Bank in Moscow. "It is completely contradictory to the reform principles, and could really hurt [the sector's] attractiveness to foreign investors."

The total generating capacity of the pooled companies will be 30.5 gigawatts, or about 15 percent of Russia's total electricity production, the statement said.

Analysts have estimated that they will control more than 40 percent of the generation assets being sold off by the former monopoly, Unified Energy System, as part of the reforms. Together, the partners will also have a near monopoly on the fossil fuels used to produce power, as SUEK is by far the country's largest producer of coal and Gazprom is the natural gas export monopoly.

Gazprom will control 50 percent plus one share of the venture, while SUEK, or the Siberian Coal and Energy Company, will hold the rest. This will include controlling stakes in four major generating companies: OGK-2, OGK-6, TGK-12 and TGK-13, as well as minority stakes in OGK-5 and TGK-5.

The other major players in the sector, including Germany's E.On and Italy's Enel, are roughly one-third the size of the Gazprom-SUEK venture, and each control only one large power producer.

Gazprom's merger with SUEK must still be approved by the Federal Anti-Monopoly Service, which is widely expected to give the green light this year, perhaps setting some minor conditions.

The service's deputy head, Anatoly Golomolzin, said it was too early to comment on the merger, as the regulator had not yet reviewed all the relevant data.

The holding company's board will have 11 members, five of whom will represent Gazprom. Four will represent SUEK and two will be independent, the statement said.

"The shareholders of the companies are reaching an agreement under English law, which will regulate their cooperation, including principles of corporate governance," it said.

As part of the agreement, SUEK will hold a closed share issue, which Gazprom will buy out completely to gain majority control.