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. Last Updated: 07/27/2016

State Seeks Bargain for Gazprom Stake

The government has indicated it will not pay a premium for the 10.7 percent stake in Gazprom it wants to open up the gas giant's free float to foreigners, sources close to the deal said Friday.

Gazprom last week said existing curbs on foreign buying of its shares would go by the end of 2005 under a new plan in which the state will secure a controlling stake in the world's largest gas producer via a cash buyback of treasury stock.

As negotiators haggle over price, sources said the government was likely to offer a price below a valuation of over $8 billion based on the price of Gazprom's London-listed proxy shares, which trade at a premium over its local stock.

"The government is not going to pay $8 billion," said one.

"There are different price expectations on both sides. The government does not want to pay a premium, arguing that Gazprom will benefit from its involvement."

The latest plan replaces an ill-starred attempt to merge Gazprom with state oil firm Rosneft. Now, debt will be raised to fund the buyback, to be recouped later by floating a minority stake in Rosneft.

Gazprom is owned 39.3 percent, directly and indirectly, by the state. The Kremlin has set regaining majority control as a precondition for scrapping a ring fence which bars foreigners from owning Gazprom's domestic shares.

The ADSs value Gazprom at $75 billion in total and the local shares at $67 billion according to current prices.

Investment bank Morgan Stanley, advising the government in the deal, and Gazprom adviser Dresdner Kleinwort Wasserstein submitted their valuations to the state last week.

Market sources said Morgan Stanley valued the 10.7 percent stake at between $6 billion and $7 billion while DrKW's was much higher.

In other sticking points, sources close to the talks said the parties were haggling over the period by when to value the stake and whether to include Gazprom treasury stock in pricing.

Through affiliated companies, Gazprom, which has 23.7 billion shares outstanding, holds between 15 and 16 percent of itself in treasury stock and wants this to be included in any valuation, market sources said.

The buyback will be done through a state-owned special-purpose vehicle, Rosneftegaz, in which Rosneft will be parked.

The twist here is that all sides represent state factions with competing interests. Both sprawling Gazprom and Rosneft are state-run, and analysts fear the money will just disappear.

"With limited faith in Gazprom's management, the risk of Gazprom squandering the proceeds in a value-destructive outcome cannot be underestimated," Alfa Bank analysts said last week.

Rosneft itself is caught up in a web of unresolved legal, operational and financial problems after borrowing heavily to buy Yuganskneftegaz, the prize unit of fallen major oil company Yukos seized in lieu of back taxes.

A chunk of Yugansk's oil receivables has been mortgaged to the Chinese in a deal in which China lent Russia $6 billion.

By its own account, Rosneft has $20 billion of debts.

Even with Yugansk, which it bought for $9.4 billion, there is concern that floating a minority stake may not fund the Gazprom buyback.

The company is also in technical default of an international syndicated loan secured to Yugansk's oil receivables, which was called in by Western banks and which it is refusing to pay.

But Western bankers see Rosneft as a sovereign risk and say raising funding should be no problem.

They also take comfort from Russia's strong public finances -- it has just agreed to prepay $15 billion of its Paris Club debts and the budget surplus is running at 10 percent of gross domestic product.

"The market feels comfortable with Rosneft," a senior London banker said. "There's huge demand for Russian state borrowers, and banks have had a relationship with Rosneft for many years."