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. Last Updated: 07/27/2016

Rosneft Merger Nears Collapse

The government may pay cash to secure a controlling stake in Gazprom and finally open the way to the liberalization of trade in the gas giant's shares, Interfax reported Friday.

This option is taking shape as hopes fade for a merger between Gazprom and state-owned Rosneft, a move that would have given the government the majority stake in Gazprom, a condition for lifting curbs on foreign share trading. The idea of a merger appears to have been sunk by infighting among government factions.

Quoting sources close to the discussions, Interfax said the latest thinking was to keep Rosneft and Yuganskneftegaz, stricken oil firm Yukos' former key unit, separate from Gazprom.

"A scheme under which the state might receive control of Gazprom by other means and not for the assets of Rosneft plus Yuganskneftegaz is under discussion," one source told Interfax. Another source said: "The state might buy 10.7 percent of Gazprom for cash. Money's not a problem."

The merger with Rosneft was a condition for removing the ring-fence restricting foreign investors from buying Gazprom's local shares. Global funds have bet big money on restrictions being swept away.

"We believe that a cash transaction would be the most transparent way to increase state ownership in Gazprom. It would also avoid a power struggle at the newly established Gazprom oil subsidiary," analysts at UFG said.

The 10.7 percent Gazprom stake the state needs is worth some $7 billion in local shares and almost $8 billion in American depositary shares.

A Dresdner Kleinwort Wasserstein valuation on behalf of Gazprom last year valued the stake at $9 billion.

Gazprom units control over 15 percent of the firm's shares, and the key issue is how to transfer them to the state and at what price, as they were bought from the market in past years at prices much lower than at present.

"A non-market-based transaction where the state just kind of grabs these shares would be bad news," one analyst said. "The government holds the key. It can be very creative and destructive. Anything difficult to value would raise questions."