LUKoil Privatization Sale Canceled

The government left investors perplexed Thursday by calling off its biggest privatization of the year, the much-anticipated sale of 5.9 percent of LUKoil.

Expectation for the sale had been building for more than a month. The road show was over by Wednesday. Orders for the stock had been taken. As of Wednesday night, people involved in the deal were already calling it a sure thing.

But then the government, historically known for its often unexpected and inexplicable behavior, canceled the privatization, saying they were not satisfied with the price.

"We are firm in what we believe is the value of this stake, and we intend to sell it at a fair price," said Vladimir Malin, chairman of the State Property Fund. "The time of privatizing Russian companies at any price is over."

Although no new timeframe for the offer has been announced, LUKoil said it intends to complete listing procedures on the London Stock Exchange to complete the future sale.

While financial adviser Morgan Stanley did not disclose the final price at which its bankers arrived, media reports said shares would have been sold at $13.60 to $14. The sale would have reaped $680 million, a sum above the government's threshold of $660 million.

A price difference of 25 cents to 50 cents per underlying share would have meant a difference in revenues of $12.5 million to $25 million, and the deal was missed by this kind of range, analysts said.

"It is the mindset, it is the bureaucracy of Russia," one financier was quoted by Reuters as saying. "They set a price of $14 per share and were not prepared to go below that."

Fund managers were confused and asked why Russian officials decided to go ahead with the three-city road show even though international markets had recently hit five-year lows.

"It seems stupid," said Mattias Westman, a director with investment fund Prosperity Capital Management. "Morgan Stanley probably had a good idea of the price at the end of last week. It's all quite difficult to understand. Maybe the problem was a lack of communication."

Various government officials had been giving conflicting signals since early July, when LUKoil CEO Vagit Alekperov confirmed that the sale was going ahead.

"We were very surprised," said Gabor Sitanyi, a fund manager for emerging European markets at Schroder Investment Management.

Sitanyi declined to say whether he had ordered any LUKoil shares, which were to have been placed as Level-1 American Depository Receipts, and called the canceled privatization a "wasted effort."

"If the budget didn't really need the cash, why go through the process spending money on a broker?" he said. "We put in a lot of work, and so it was kind of a waste on our part, too."

The government may be making a mistake in putting it off, Sitanyi added. If there comes a time when Russia really needs the money, the situation on the markets might be worse.

"In my view, they should have taken the money and run," he said.

The abrupt cancellation will distort the market, fund managers said. Many investors sold LUKoil shares ahead of the sale because they anticipated a new supply would come on the market. These investors were buying up the stock on Thursday, which resulted in LUKoil leading the market by closing up 3.02 percent at $14.65.

Some said the delay was a positive sign and pointed to a rise in the share price as proof.

"We approve of the postponement, as it is better to delay the sale than to receive a lower price, which would generate less revenue for the federal budget," Alfa Bank said in a research note. "It also suggests that Russia is not desperate to raise funds from cash privatization, unlike in the past."

Another big privatization, however, is still scheduled to go ahead. The government originally planned to privatize 19.68 percent in Slavneft, an oil company owned jointly by Russia and Belarus, this fall after the LUKoil sale.

First Deputy Property Minister Alexander Braverman told a news conference in London that the LUKoil delay would not have an impact on the Slavneft sale.

He also said the cancellation of the LUKoil sale would not affect the 2002 or 2003 federal budgets. However, it does mean that the government will have less money to put toward its 2002 debt payments of about $11 billion.