Gazprom pledges free float in 2005, market awaits terms

Russian gas giant Gazprom's chief executive Alexei Miller promised on Wednesday to open up the company's free float to foreign investors before the year-end, a move likely to trigger billions of dollars of investment flows. Russia has come up with a new plan to liberalise Gazprom's share trading by securing a controlling stake in the world's largest gas producer for cash in a major step towards turning it into a top emerging market play.
The state's buyback of treasury stock from Gazprom affiliates would allow it to scrap a bar on foreign ownership of the company's local shares and herald an upgrade of its weighting in key emerging market indices, analysts said.
The plan replaces an ill-starred attempt to merge Gazprom with state oil firm Rosneft, with debt raised to fund the buyback to be recouped by floating a minority stake in Rosneft later.
"The liberalisation will be carried out in full. We are planning it in 2005," said Miller. "There will be no more obstacles," Miller told Gazprom-owned NTV television.
Under the deal, the state will raise its stake of just over 38 percent in Gazprom to over 50 percent through a share buyback for 10.7 percent of Gazprom's treasury stock by the company's June 24 annual general meeting.
The purchase will be done via a state-owned special purpose vehicle, Rosneftegaz, in which Rosneft will be parked.
The catch is in the pricing, however. Sources close to the negotiations said the terms could still roil investors.
QUESTIONS UNANSWERED: The 10.7 percent stake in Gazprom is worth some $7 billion, based on the local share price, or over $8 billion if London-listed American depositary shares (ADSs), which trade at a premium, are taken as a benchmark.
Before Rosneft's controversial purchase of oil major YUKOS's core unit, Yuganskneftegaz, Dresdner Kleinwort Wasserstein (DrKW) had valued the Gazprom stake at $9 billion.
Advisers Morgan Stanley and DrKW have submitted their final valuations, and market sources fear the price tag may be below expectations.
"The main question that still remains is the purchase price," said one. "Gazprom shareholders may feel the agreed valuation for the deal is lower than they might have hoped."
"The benchmark in any valuation for the government here is the local share price, while for Gazprom it is the ADS."
Rosneftegaz needs to come up with the cash, and banking sources expect it to tap the syndicated loan market soon.
Senior syndicate bankers in London said there had not been any preliminary discussions on a deal so far, but that raising funding should be no problem, given the appetite for Gazprom.
"I think there will be a bit of a fight to get in on this deal," said Steven Dashevsky, analyst at Aton brokerage in Moscow. "It's potentially hundreds of millions of dollars in fees. It's a blockbuster deal from every way you look at it."
Investment bank UFG says any such loan could be granted sovereign status, meaning it would be investment grade.
Rory MacFarquhar, economist at Goldman Sachs in Moscow, said the announcement is marginally negative for Russian sovereign debt, since it raises the prospect of a large increase in demand for default protection by institutions participating in funding.
But he said the deal was positive for Gazprom debt, since the company stands to gain a windfall of cash, though the Russian press speculates that it may use that cash to purchase another oil company such as Sibneft.
Gazprom is marketing a new Eurobond, to be issued both in euros and dollars, with pricing expected on Friday, sources said. Standard & Poor's took Gazprom off review and affirmed its BB- rating now that the Rosneft merger is off the agenda.
The deal is also good news for equities, with the removal of the ring-fence on foreign investment to allow Gazprom's weighting in the benchmark MSCI Russia emerging markets index to go up to 25 percent from just 3 now, analysts at Alfa Bank said.
That could generate additional demand from benchmarked portfolios for about $6 billion of stock, they predicted.