Miller Vows to Free Gazprom Shares This Year

APBy acquiring a majority stake in Gazprom, the state is opening the way to greater foreign ownership of the gas giant.
Russia said on Friday that it would scrap all curbs on share trading in Gazprom by the end of 2005, a move likely to attract billions of dollars of investment, after it secured a controlling stake in the gas monopoly.

Liberalization will turn Gazprom into the global No. 2 emerging-market blue chip, after South Korea's Samsung Electronics, following a likely upgrade of its weighting in benchmark indexes tracked by fund managers.

"Liberalization will be carried out in one fell swoop," Gazprom chief executive Alexei Miller told a news conference after a key shareholders' meeting, at which he promised that curbs would go by the end of the year.

To enable liberalization, the state is boosting its share in Gazprom to over 50 percent by buying a 10.7 percent stake in the firm by purchasing its treasury shares for $7.12 billion. Gazprom said the transaction had now been completed, but payment would come by the end of the year in three tranches -- the first within a month and the last by Dec. 25.

Miller said Gazprom would use the proceeds soon to make an offer to buy some of the assets of state oil firm Rosneft, mainly on the remote eastern island of Sakhalin, where Rosneft has joint ventures with ExxonMobil and BP.

Miller told shareholders earlier that Gazprom was planning a major move into oil and wanted to emulate Western oil giants BP, Exxon and Shell by getting half its income from oil.

Fund managers had expected liberalization to be partial, with the limits expected to be relaxed to 25 percent only.

Foreign investment in Gazprom equity is currently capped at 20 percent. Foreigners can freely trade only American Depositary Shares, which account for 3 percent of Gazprom stock and trade at a premium to local common shares.

"They will probably remove all the barriers, which is very positive, although this may happen in several stages," said Oleg Jelezko, head of structured products at Renaissance Capital investment bank, which manages $300 million of assets in Gazprom.

Friday's news had little impact, with Gazprom local shares up only 0.65 percent to trade at 85.15 rubles ($2.97) as of early afternoon.

"Today's news is step zero in terms of share trade liberalization," said Renaissance Capital analyst Adam Landes. "There are loads of steps that now need taking. The first one will be in September when we'll see what legislative amendments are taking shape and who's leading them."

With payment of the deal deferred, questions also remain on financing. The government plans to finance the deal by floating a minority stake in state oil firm Rosneft via an initial public offering.

The plan replaced an ill-starred attempt to merge Gazprom with Rosneft.

The purchase of Gazprom treasury stock will be achieved via a state-owned special purpose vehicle, Rosneftegaz, in which Rosneft will be parked. Rosneftegaz will raise debt from international markets and repay it later by floating a minority stake in Rosneft.

Banking sources said earlier this month that ABN AMRO and Barclays were trying to put together a bridging loan to finance the deal.

Bankers said the first tranche of financing would be for around $1 billion and correspond to the amount of tax that would arise for Gazprom because of the transaction. Miller said these taxes would amount to less than $1 billion but gave no details on the financing.

Banks are interested in the deal despite a web of legal, operational and financial problems entangling Rosneft.

Rosneft is saddled with $20 billion of debt after it borrowed heavily to buy Yuganskneftegaz, the prize unit of fallen major oil company Yukos, which was seized in lieu of back taxes. The Yugansk acquisition also brought a high risk of litigation threatened by Yukos shareholders and owners.

A chunk of Yugansk's oil revenues has also been mortgaged to China, which has lent Rosneft $6 billion.

Many investors remain suspicious of the Rosneft IPO, having already been burned once by the destruction of Yukos, whose market value has crashed from a peak of $40 billion to $1 billion.

The deal is positive for Gazprom debt, since the company stands to gain a windfall of cash. Gazprom says it may not need further borrowings this year.

Gazprom is Russia's most leveraged company and an active borrower on capital markets, with eurobond issues averaging about $2 billion a year.

The removal of the curbs will boost Gazprom's weighting in the benchmark Morgan Stanley Capital International Russia emerging markets index to 25 percent from just 3 percent now. That could generate additional demand from benchmarked portfolios for about $6 billion of stock, Jelezko predicted.

 Gazprom shareholders voted to keep the same board of directors this year, as representatives of Hermitage Capital Management and the Federal Energy Agency were not added.

Government officials kept five seats on the 11-person board, company management got four seats, a representative of E.ON kept his seat, and Boris Fyodorov, honorary chairman of United Financial Group in Moscow, will remain the gas producer's only independent director, the company announced Friday.

Vadim Kleiner, head of research at Hermitage CapitalManagement did not receive a seat on the board.