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. Last Updated: 07/27/2016

Yukos Powers Ahead With Sibneft Merger

Undeterred by large-scale fraud charges against a key shareholder, Yukos on Monday powered ahead with the biggest merger in Russian corporate history.

The oil giant, which recently overtook LUKoil as the nation's biggest producer, said it would buy back 10 percent of its own shares for 505 rubles ($16.67) each, valuing the stake at $3.7 billion, and issue an additional 1 billion shares to swap for shares in merger partner Sibneft to complete the acquisition.

Earlier this year, owners of 92 percent of Sibneft agreed to sell 20 percent of their stake to Yukos for $3 billion in cash and swap their remaining shares for a blocking stake (more than 25 percent) in the new company, YukosSibneft.

Yukos tapped investment bank Trust to handle the buyback, and shareholders will be able to apply to sell their shares between Aug. 6 and Sept. 5.

Trust is widely thought to be the creation of Platon Lebedev -- a major shareholder in Group Menatep, the parent company of Yukos.

Lebedev was arrested late on Wednesday and charged with defrauding the state out of more than $280 million in a transaction that dates back to 1994.

A Trust spokeswoman said Monday, however, that although Lebedev is Trust's board chairman, he is not among the shareholders the bank is required to divulge, which are those with more than 5 percent.

Lebedev's arrest and the questioning of Yukos chief Mikhail Khodorkovsky by law enforcement officials on Friday spooked investors, driving the company's stock down some 9 percent in two days.

But it recovered most of that Monday, jumping nearly 5 percent to just over $14 on news of the merger progress.

Yukos will only buy back 10 percent of its own shares, so should 100 percent of shareholders wish to sell at the price announced Monday, Yukos will do so only on a pro-rata basis, meaning that at least one share will be bought from each shareholder.

"The key factor in estimating the price one might realize from tendering the shares is how many Yukos shareholders will participate in the offer," Aton brokerage said in a research note Monday.

Depending on whether Yukos core shareholders, who hold 74 percent of the company's stock, participate in the offering, the implied price of the buyback will fluctuate between $13.73 and $16.67, according to Aton, citing company data.

For example, if all shareholders want to sell their shares, only 10 percent of the claims will be honored, so the fair value of the offer will be calculated as a weighted average -- 10 percent of $16.67, plus 90 percent of $13.40 (the closing price on Friday, the deadline for buyback participants) -- which would come to $13.73.

"The buyback program is a form of cash distribution," said Valery Nesterov, oil and gas analyst with Troika Dialog. "Equivalently, the company could have distributed cash in the form of dividends."

Aton said it expects core Yukos shareholders to participate in the buyback, citing the company's free float, which could drop to as low as 16 percent or even 11 percent after the merger if they pass up the opportunity to cash out. To be included in several lkey emerging market funds requires a free float of at least 20 percent

Yukos spokesman Alexander Shadrin said the company would not disclose if its core shareholders were planning to participate in the tender.

"One should ask our shareholders, not Yukos," Shadrin said.

Another reason that Yukos shareholders will likely participate in the buyback is in order to meet the terms of the Sibneft deal, under which the two companies are committed to have similar debt-to-equity ratios by the time the merger is finalized.

Yukos has a huge market capitalization, more than $30 billion, and a relatively small amount of debt, whereas Sibneft has a much higher debt load and a much lower market cap.

"Yukos is optimizing its capital structure, replacing equity with debt financing," said Ivan Mazalov, analyst at Commerzbank in London.

Meanwhile, Trust said it was preparing to raise up to $250 million through its first eurobond issue, according to news agencies.