Uncertainty Hangs Over LUKoil Sale

Uncertainty reigned from morning until late Wednesday night as investors waited for the government to give the green light to Russia's largest privatization of the year.

While sources close to the deal said the privatization of 5.9 percent of LUKoil, Russia's largest oil company, is a go, government officials stayed silent in London despite earlier promises to make a decision by July 31.

At first, the privatization project committee -- which includes Economic Trade and Development Minister German Gref and First Deputy Property Minister Alexander Braverman -- were supposed to make an announcement early Wednesday, Interfax reported.

They then were supposed to decide in the second half of the day in London. And this even got pushed back to 9 to 9:30 p.m. Moscow time.

By 11:30 p.m., no decision was announced and no one could be reached for comment.

If the deal does go ahead, the price at which the shares are to be sold will not be known until after U.S. markets close early Thursday morning Moscow time.

Despite the reticence of government officials, market watchers were optimistic, saying demand for the stock far exceeded the 12.5 million American Depositary Receipts, or ADRs, available.

LUKoil shares closed off 2.4 percent at $14.25 in Moscow. At this price, the placement would raise $712.5 million, with each ADR made up of four local shares. Earlier, government officials had said they wanted to see proceeds of $660 million to $800 million.

Morgan Stanley, the government's financial adviser as well as the sole bookrunner for the sale, stopped taking orders from investors at 5 p.m. on Wednesday.

The long-awaited sale was hotly debated in the Kremlin and in the media, not only because both Russia and LUKoil have a controversial privatization history, but because government officials decided to go ahead just as markets around the world fell to five-year lows.

LUKoil CEO Vagit Alekperov scooped up the jewels of the Soviet oil industry and created LUKoil in the mid-1990s when Russia's most lucrative companies were sold at rock-bottom prices through shady loans-for-shares deals. He was at the time acting minister of the now-defunct oil production ministry.

The controversy did not stop there. As recently as 1999, Reforma Investment, an obscure Cyprus-based company, won an auction for 9 percent of LUKoil with a bid that was only $5,000 above the asking price of $200 million. It is widely believed that LUKoil managers were behind Reforma. Alekperov has repeatedly denied the allegation.

Alekperov, however, has not been known for always being upfront. According to the sale's prospectus, which surfaced last Thursday, Alekperov owns about 10 percent of LUKoil. As recently as a month ago, he said he had only 3 percent.

For the past week, a delegation of company and government officials have been on a three-city road show trying to convince institutional fund managers to bid for shares.

The LUKoil placement process worked in the following way: When investors placed an order in the "book" (orders are now put in by phone and filed electronically; the term is a throwback to the time when bankers used an actual book), they entered into an agreement with Morgan Stanley to buy a certain number of shares at different price levels. For example, an investor could agree to dedicate $200,000 at $13 per share but only $100,000 at $14 per share.

After the book was closed, Morgan Stanley was to look at the structure of the orders to find a price at which all shares are placed. The bankers usually set a price that will result in oversubscription so they can pick and choose among investors. In determining which investors end up with shares in hand Thursday morning, the bank chooses those investors it believes will hold on to the shares, instead of just selling them the next day.

"The offering has to have the right story and the right fundamentals as well as trust among all parties involved," said a source close to the deal. "If one of those elements falls through, then these things don't get done."

Many London- and Moscow-based analysts who usually can talk for hours about LUKoil have been tight-lipped about the sale. Securities regulators require that those involved in the deal refrain from commenting on the stock from the start of the road show -- last Thursday -- until 40 days after the placement.