Wall Street Journal - 12.16.2003

 

 

 

 

The Wall Street Journal


Breaking Up

Yukos and Sibneft Agree To Unwind Their Merger 

By JEANNE WHALEN and GREGORY L. WHITE 
Staff Reporters of THE WALL STREET JOURNAL 

MOSCOW -- Two Russian oil giants have agreed in principle to undo a $13 billion merger that had been hailed as the biggest in post-Soviet history, according to people familiar with the talks, leaving investors uncertain of the fate of the two companies. Controlling shareholders in OAO Yukos, which is embroiled in a battle with the Kremlin, and smaller rival OAO Sibneft have agreed to split and become independent companies again, two months after the near completion of a merger that was to create the world's sixth-largest publicly traded energy company. 

The terms of the breakup haven't yet been signed, however, and the two sides appear to have different views on how quickly the transaction can be unwound. Yukos is expected to reveal details of the talks at a news conference Wednesday." Processing a [divorce] could take many months -- as long as it took to process" the merger, Leonid Nevzlin, one of Yukos's biggest shareholders, told the Interfax news agency Tuesday. 

Mr. Nevzlin didn't return calls seeking comment. 

Some investors and analysts fear a split will leave Yukos even more exposed to a six-month-old legal probe by the state. Yukos's largest shareholder and former chief executive, Mikhail Khodorkovsky, was arrested in late October on charges of fraud and tax evasion, which he has denied. He claims the case is a politically motivated attempt to intimidate him, which the state denies. 

Mr. Khodorkovsky had been aggressively building a political base that threatened the majority in parliament, which supports President Vladimir Putin. Yukos's partnership with Sibneft was thought to have given Mr. Khodorkovsky a level of political protection, as Sibneft's core shareholder, Roman Abramovich, is generally considered an ally of the Kremlin. Analysts said Mr. Abramovich's decision to walk away from Yukos would give the state freer rein to punish the company in an attempt to force Mr. Khodorkovsky to give up his controlling stake in the oil producer. 

It would also make either company an easier acquisition target for a major foreign oil company, such as Exxon Mobil Corp., which has shown interest in buying part of a Russian oil company. Yukos shares fell 1.6% Tuesday, as the overall Russian market fell 1.3%. 

Yukos was hurt by a negative report from Goldman Sachs, which initiated coverage of the company with an "underperform" rating, citing political risk. "YukosSibneft could face disruption to its activities, fines and even asset expropriation," Goldman said, using the name of the combined company. Yukos has maintained that its assets won't be harmed. 

The Yukos-Sibneft merger was all but completed in October when Yukos paid Sibneft's core shareholders $11 billion in cash and stock for their majority stake in Sibneft. But Mr. Abramovich asked to be released from the merger a month after Mr. Khodorkovsky's arrest." A decision has been made to separate as peacefully as possible," a person close to Yukos's core shareholders said Tuesday, adding that the exact terms hadn't been worked out. 

A person close to Sibneft said that the sides had generally agreed that Mr. Abramovich and his partners would return $3 billion in cash and a 26% stake in Yukos to the company, and regain control of Sibneft. The merger agreement set a $1 billion fee for canceling the deal, but the Sibneft camp says it doesn't expect to pay it. 

People close to Yukos said they would be willing to forgo the fee to ensure an amicable parting. But the people close to Yukos suggested it was in no rush to complete the divorce, partly because keeping Sibneft inside Yukos might help deter any state attempts to threaten Yukos or its assets. 

The government has already revoked an oil-field license from Yukos and said it could withdraw others. Investigators have frequently raided Yukos's offices, while tax authorities have accused the company of evading $5 billion in taxes and suggested they could slap it with a bill. 

Many Russian businessmen and analysts believe the state is trying to pressure Mr. Khodorkovsky and his partners to give up their controlling stake in Yukos, an allegation the state denies. 

While many analysts and minority shareholders have expressed concern about Yukos's future, many investors are holding on. Alexander Branis, director at Prosperity Capital Management, a Swedish fund manager that specializes in Russia, says he doesn't expect Yukos to suffer significant damage from the official probes. "We believe Putin when he says the goal is not to destroy the company. It's a major employer and a big taxpayer. Destroying it would be very bad for the economy and business in general," he said Tuesday. 

Of the roughly $500 million Prosperity Capital has under management, more than 20% is invested in Yukos and Sibneft.