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. Last Updated: 07/27/2016

State to Sell Gazprom Stake in Pieces

The government's apparent decision to break up a 5 percent stake in natural gas monopoly Gazprom and sell it in smaller pieces suggests Russia has had a tough time finding a buyer for the shares, analysts said Tuesday.

President Boris Yeltsin signed a decree Monday slightly altering an Aug. 10 order to sell 5 percent of Gazprom, part of the state's 40.1 percent stake, to one strategic buyer. The new decree allows the 5 percent to be sold in several pieces without specifying the time or the procedure of the sell-off.

Russia is counting on the Gazprom sale to bring in big privatization proceeds this fall. At the current price of $9.65 per Gazprom's American Depositary Receipts, a 5 percent stake in Gazprom would fetch about $1.1 billion.

Most analysts assume the government is attempting to sell its Gazprom stock at ADR prices, and not at the price of Gazprom's domestic shares, which cost one-tenth the price of ADRs.

But buyers are not leaping forward to seize the 5 percent stake.

"No one is willing to put up the $1 billion to $1.5 billion the ADR price would imply," said Jim Henderson, an oil and gas analyst with MFK Renaissance.

It may be just as hard for the government to sell the stake piecemeal.

Analysts said a financial investor with a smaller holding than 5 percent doesn't stand to receive any fat dividends or capital gains in the coming years.

And beyond the general hesitation investors feel toward Russia and other emerging markets, there is particular uncertainty surrounding the fate of Gazprom in the new Russian economy, said Stuart Amor, an oil analyst with Credit Suisse First Boston in London.

"I wouldn't have thought investors would be that interested at the moment," Amor said. "Things are a little bit uncertain now - you don't know what you're buying: Taxation is up in the air, there's no long-term plan for regulation in place."

Of course, Gazprom is priced very attractively now, analysts said.

Compared with the ADR peak of $28 in October 1997, and even the $15.75 price charged when the ADRs were first issued in December 1996, today's price is a steal.

Apart from the price, there is much about Gazprom that can be attractive to investors. It controls one-third of the world's gas reserves and is the main supplier of gas to Europe.

So far, three foreign companies have expressed interest in acquiring the Gazprom shares. But it is unclear whether they want to buy the shares now, or how big a stake they are seeking.

At a September news conference commemorating the 25th anniversary of Russian gas deliveries to Ruhrgas, Germany's national gas company, Ruhrgas chief executive Friedrich Spaeth said the company was considering buying Gazprom shares.

At the same news conference Spaeth and Gazprom President Rem Vyakhirev signed a deal to continue the two companies' partnership through 2020, prompting analysts to speculate Ruhrgas might wish to strengthen the bond and facilitate possible new gas projects in Europe by buying Gazprom equity.

A spokesman for Ruhrgas would not comment Tuesday on the company's plans regarding Gazprom.

Another strategic partner, Royal Dutch/Shell, has proved it doesn't need Gazprom equity to build a strong partnership.

When Shell and Gazprom announced the creation of their joint venture one year ago, Shell pledged to buy $1 billion worth of convertible bonds in Gazprom to prove its commitment and help fund joint projects.

But poor market conditions have delayed the planned $2 billion issue of those bonds to Shell and other institutional investors. Despite this, Shell and Gazprom are proceeding with their first project - development of the Zapolyarnoye gas field on the Arctic Yamal Peninsula.

"We are pleased with the cooperation between the two companies," said Grant Bowie, director of Shell's Moscow office. "The study work on the Zapolyarnoye field is going according to plan."

The Shell-Gazprom joint venture has not been registered for reasons unrelated to the bond issue, a Gazprom spokesman said.

Ultimately, analysts said, Shell or Gazprom's second strategic partner, ENI of Italy, would rather see their investment go to Gazprom than to the government, which will collect the proceeds for the 5 percent sale.