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. Last Updated: 07/27/2016

IPO Could Value Rosneft at $73Bln

Itar-TassPutin greeting Transneft's Semyon Vainshtok on Wednesday. From left, Bogdanchikov and LUKoil's Vagit Alekperov.
Rosneft looked to be heading for a valuation of more than $73 billion as bankers closed the books for bids Wednesday in the biggest Russian initial public offering in history.

BP, China's CNPC and Malaysia's Petronas have reportedly offered to stump up to $5 billion in offers for the shares. Foreign portfolio investors, until now reluctant to take part in a sale seen as too pricey, appear to be moving in at the last minute, banking sources said.

Bankers indicated earlier Wednesday that the IPO was going to fly when they told potential investors they would only take bids at the top end of the price range, at between $7.15 to $7.85 per share. That would value Rosneft at more than $73 billion, a premium on Russia's biggest oil company, LUKoil.

Rosneft is set to issue up to 14.9 percent of its shares on exchanges in Moscow and London on Friday.

A high valuation would signal success for the Kremlin's flagship oil firm in a share offering that has been fraught with legal risks and slammed by critics as an attempt to legitimize the state's bid to wrest back control of the strategic oil sector. Former presidential economic advisor Andrei Illarionov has slammed the sale as "a crime against the Russian people" for bypassing budget and privatization procedures.

Some investors, however, said the IPO presented a chance to buy into the growing might of the Kremlin as Rosneft looks set to secure preferential treatment in future deals.

"It's going to be huge," said Eric Kraus, manager of the Nikitsky Fund. "[President Vladimir] Putin says he wants it to be Russia's leading oil company and he gets what he wants. They want someone who can go head-to-head with Exxon and Shell."

In a sign the Kremlin looked to be pressing ahead with that bargain, Interfax on Wednesday evening cited a source close to Rosneft's board as saying it was in talks to buy Moscow-based conglomerate Sistema's 25 percent in Bashneft, the oil company of Bashkortostan.

Last month, Rosneft won control of TNK-BP's Udmurtneft after China's Sinopec agreed to buy the unit for it in return for receiving a minority stake. No one at Rosneft or Sistema could be reached for comment on the Interfax report.

Rosneft tripled its production base after it took over the crown jewels of Mikhail Khodorkovsky's Yukos oil empire, Yuganskneftegaz, following its sale in a forced government auction for a knockdown price.

The acquisition made Rosneft a target of lawsuits by Yukos shareholders as the country's one-time No. 1 oil major was crushed under the weight of more than $30 billion in back taxes.

It also propelled Rosneft into a position where it could fend off a takeover bid by state-controlled gas giant Gazprom.

Barclays Capital chairman Hans Jorg Rudloff, a recently appointed director on Rosneft's board, called the company's push to take the company public a "validation" of policies to push Russia to become part of the global economic system.

"I think it's a huge step forward," Rudloff said by telephone from London on Wednesday.

"This was not about money. There is a desire to integrate. This is a company that did not have to submit itself to the rules of foreign exchanges. ... Now it will have to adhere to international standards."

But some investors said the enticing of foreign oil majors to buy up chunks of Rosneft shares -- due to low portfolio investor demand -- meant that the IPO had nothing to do with global market integration.

Instead, they said, the IPO has only highlighted the growing autocratic rule of the Kremlin as investors consider buying in to curry favor with the authorities.

"Anyone who wants to send a valentine to Vladimir Putin saying, 'We care,' is buying," Kraus said. "This is not a market issue."

Rosneft's bankers have been touting the shares as a "ticket" to future oil and gas deals in Russia now that the Kremlin has reasserted control over the energy sector and promised deals to foreign oil majors only on its own terms.

In a sign foreign oil majors' participation was far from decided, Interfax cited a source close to the deal late Wednesday as saying Rosneft's bankers would meet with strategic investors Thursday to finalize the allocation of shares.

Rosneft president Sergei Bogdanchikov has said no single investor can hold more than 2 percent of the company's shares, giving potential stakeholders no say in decision-making at the company.

CNPC has said it could invest up to $3 billion in the offering. An Indian oil ministry official told Bloomberg on Wednesday that India would make its decision over whether to invest over the next two weeks even though the shares will be listed over the next week.

The Financial Times cited people close to the deal Wednesday as saying BP would invest $1 billion. In a possible hint it may be raising cash for the issue, BP has said it is selling its stake in a Gulf of Mexico field for $2.2 billion.

BP spokesman Toby Odone declined to comment on the IPO on Wednesday.

BP's Russian venture, TNK-BP, has been under fire. It faces more than $2 billion in back-tax bills, and its flagship project to develop the vast Kovykta gas field in eastern Siberia has been stalled for years amid opposition from Gazprom.

Robert Amsterdam, an international lawyer for Khodorkovsky, said BP was a hostage to "Kremlin impunity."

"BP is not in Siberia. It's not in a concentration camp. But it is hostage to a Kremlin points system where political points are required to protect your investment as there's no rule of law," he said.

Britain's Financial Services Authority rejected a last-ditch bid by Yukos to thwart the sale on the London Stock Exchange on the grounds that the IPO was tantamount to abetting the sale of stolen goods.

Yukos received a letter late Tuesday that said the FSA was rejecting its complaint. The letter gave no reason, but said the shares listing in London would go ahead from next Wednesday onward.

A source close to Rosneft said trading would start as planned on Moscow exchanges on Friday, the eve of the Group of Eight summit.

While Rosneft shares will be officially listed in London on Wednesday or later next week, trading can start on Friday once the price has been announced.