© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: October 22, 2012 7:54 am
The deal means BP will swap its troublesome partnership with a group of Russian oligarchs for an alliance with arguably Russia’s most powerful company – the Kremlin-backed national energy champion.
The board gave BP’s executive team “strong support” to reach a deal that would see the UK group sell Rosneft its 50 per cent stake in TNK-BP for a mixture of cash and shares, according to a person familiar with the matter.
BP on Monday confirmed the talks were taking place with Rosneft but said no agreement had yet been reached.
The transaction would mark the end of a joint venture that has been hugely lucrative for BP but proved to be a massive headache for the company. BP’s frequent run-ins with its partners, a consortium of Soviet-born billionaires known as Alfa-Access-Renova, grabbed headlines, alarmed investors and dragged down BP’s share price.
Bob Dudley, the then-chief executive of TNK-BP, had to leave Russia in 2008 after what BP called a campaign of harassment. His attempt as BP chief to clinch a $16bn share swap deal with Rosneft last year was blocked in the courts by AAR. BP finally threw in the towel this year, announcing in June it was pursuing a sale of its half of TNK-BP.
However, there is concern among some shareholders that BP’s new partner could prove just as problematic. Led by Igor Sechin, one of President Vladimir Putin’s closest allies, Rosneft is dominated by the state and some have questioned whether BP would have any say in its corporate governance.
BP will receive around $11bn-$13bn in cash and a stake of just over 19 per cent in Rosneft, worth at least $13.9bn based on Rosneft’s $73.4bn market capitalisation, said the person familiar with the matter. That would leave it as the second-largest shareholder in Rosneft after the Russian state.
BP would receive the roughly 12.5 per cent of Rosneft shares that the Russian company owns in itself, as well as some Russian government shares held in a state investment vehicle, Rosneftegaz.
Company officials cautioned that the deal was highly complex and some important details remain to be fleshed out. Kremlin approval for the whole transaction will also be required.
“We are getting closer, but you can’t say it’s done,” said a person close to the BP-Rosneft negotiations. “There are contingencies.”
BP, which has owned about 1.4 per cent of Rosneft since it was floated in 2006, could now get two seats on the Russian company’s board to reflect its expanded holding – though the person indicated that one seat was “more likely”.
Rosneft is also likely to announce soon that it has reached agreement to buy out AAR’s stake. The consortium signed a preliminary deal last week to sell its half of TNK-BP to Rosneft for $28bn.
Some have questioned whether Rosneft will have the financial firepower to buy out both BP and AAR. But a person familiar with the matter said Rosneft could easily raise enough funds for the deal without endangering its investment grade credit rating. He said any debt raised for the transaction would benefit from the Russian state’s backing for Rosneft, effectively resembling a sovereign bond. Also, the newly expanded company will be able to borrow against a much larger cash flow and asset base. In addition, payments to AAR are likely to be deferred over several years.
Absorbing the whole of TNK-BP would transform Rosneft into the world’s largest publicly traded oil company, with production of 4.5 million barrels a day – more than ExxonMobil.
BP is being advised by five banks – Morgan Stanley, Goldman Sachs, UBS, Credit-Suisse and Renaissance Capital, as well as Lambert Energy Advisory. Rosneft is being advised by Bank of America Merrill Lynch and Citigroup.
BP and Rosneft declined to comment.
Additional reporting by Anousha Sakoui
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in