YukosSibneft joins global elite

by Alexander Zemlianichenko

Khodorkovsky was smiling as he shook hands with Shvidler after announcing that Yukos would acquire Sibneft to create one of the world's biggest oil companies. Russia's richest man could barely control his glee -- not only did he beat some of the world's largest oil companies to the punch, but he made himself a member of their exclusive club in the process.
As expected, a visibly jubilant Yukos CEO Mikhail Khodorkovsky joined his Sibneft counterpart Eugene Shvidler in announcing the largest deal in corporate Russian history, a $ 15 bn union that will see the new company leapfrog over the likes of British BP, US ChevronTexaco and French TotalFinaElf into the No. 2 slot in the hydrocarbon universe.

The two executives spoke only briefly and refused to answer questions, saying that many details of the tie-up had yet to be hammered out. But it was enough to out the worst-kept secret in the market -- Khodorkovsky and Roman Abramovich, Sibneft's largest shareholder, were joining their oil fortunes.
"The new industrial giant with its huge industrial and financial potential will become even more efficient, moving closer to our strategic goal of becoming a leader of the global energy market," said Khodorkovsky, who will be CEO of the new company, while Shvidler will chair the board. Khodorkovsky said that combining the forces of the two fastest-growing domestic oil companies would create a new powerhouse that could tackle some of the most complicated upstream projects in Russia, such as tapping new oil fields in eastern Siberia and on the Caspian Sea shelf.

The new company, YukosSibneft Oil, will own the second-biggest oil and gas reserves in the world after ExxonMobil, with 19.4 bn barrels of oil and gas equivalent, and will be No. 4 in terms of production, pumping 2.3 mm bpd of crude, the companies said. The combined company will have an estimated value of nearly $ 36 bn, making it by far Russia's biggest company, although its daily output will still be dwarfed by Gazprom, which produces the gas equivalent of 9 mm bpd of oil.
The haste of the merger was apparently a result of Khodorkovsky's -- and perhaps the government's -- determination to prevent another supermajor from gaining access to Russian oil reserves, which are second only to Saudi Arabia's. In January, BP agreed to pay the owners of the Tyumen Oil Co., or TNK, $ 6.75 bn to combine both companies' Russian holdings and split ownership of the new company 50:50.

Sibneft long ago declared itself for sale if the price was right, and most analysts predicted it was only a matter of time before Abramovich and other shareholders sold out to either TotalFinaElf, Shell or ExxonMobil, all of whom were reportedly interested. But Khodorkovsky trumped all suitors, and the reaction from the government suggested that he may have been encouraged to keep Sibneft in Russian hands.
"This new company is the flagship of the Russian economy," said Prime Minister Mikhail Kasyanov, who was among the slew of senior officials to hail the deal. "There is no doubt that the enlargement of the companies will benefit both the state and private owners," he said. "It means winning new positions on the international market."

YukosSibneft will also control 2,500 filling stations and 10 refineries in Russia, Lithuania and Belarus. Under the terms of the complex cash and stock deal, which is expected to take a year to complete, Sibneft's core shareholders, who are thought to own an 87 % stake, will get $ 3 bn in cash for 20 % of Sibneft up front. The other 67 % will be swapped later for shares in the new company at a ratio of 0.36125 % for every 1 % of Sibneft stock.
That would leave Sibneft's core shareholders with a minority but blocking stake in the new company of 26 %, sources close to the deal said. Yukos, including minority shareholders, meanwhile, would retain 71 %. The rest would belong to investors who hold the 13 % of Sibneft shares traded on the stock market.

These minority investors, however, will not get the same deal as Abramovich and the other core Sibneft shareholders, as terms for the swap of their shares have yet to be drawn up. YukosSibneft promised, however, that it would make them a "fair offer" after consulting with an "internationally recognized bank."
A source close to the deal said the companies felt forced to go ahead with the announcement despite not having finalized the details of the deal in order to stave off the wave of rumours about the merger. The source said the fact that both companies have American Depositary Receipts that trade on Western exchanges made the legal requirements of the merger especially complex.

While analysts generally applauded the tie-up for creating a global powerhouse that would give Russia more clout internationally, most slammed the companies for keeping minority investors in the dark. "Frankly I am disappointed that minority shareholders are not immediately part of this deal," said Steven Dashevsky, senior oil and gas analyst at Aton.
However, despite the current uncertainty, it seemed unlikely that the companies would risk souring the landmark deal by infringing on minority rights, analysts said. Adam Landes of Renaissance Capital pointed out that for now Sibneft's shareholders could be in the dark too about the final terms of the deal because they would depend on the price of Yukos' shares at the time the swap is carried out.

Yukos' share price could fall following the company's stated intention to take cash out of the company via a dividend payment or share buyback ahead of the merger. After each rising by more than 10 % in the, shares of Yukos and Sibneft both rose just over 1 % on the RTS to close at $ 11.28 and $ 2.40, respectively.
The two oil companies announced a similar merger back in 1998 but called it off amid plummeting world oil prices and a disagreement on terms, reportedly, between Khodorkovsky and Sibneft founder Boris Berezovsky.