Chinese largest private oil and gas company CEFC China Energy will become shareholder of Rosneft paying $9 billion

CEFC China Energy
CEFC China Energy

Caused a lot of questions the structure of Glencore and Qatar which bought more than 14% of shares of “Rosneft” with a loan turned out to be temporary.

Consortium of Swiss commodity trader Glencore and the Qatari investment Fund QIA, agreed to sell most of its stake in Rosneft to the Chinese investor. Buyer 14,16% of shares of “Rosneft” will be the private oil company CEFC China Energy (“Huaxin”), as announced by Glencore and confirmed by the head of “Rosneft” Igor Sechin. The amount of the transaction exceeds $9 billion, making it the largest Chinese investment in Russian business. However, most of this money will not come to Russia: they are going to be paid by consortium of Glencore and QIA for their loans which were taken from the Italian Intesa and Russian banks for privatization of part of “Rosneft” less than a year ago.

Glencore and QIA will keep between both just over 5% of shares of “Rosneft”. Having sold to the Chinese the part of the privatized package in Rosneft, which was bought on borrowed money, the consortium is at once relieved from the debt burden and image risks, which carried the opaque credit. But if some issues go away, then others appear: the third largest shareholder of “Rosneft” becomes the ambitious Chinese conglomerate with unclear ownership structure and own kind of philosophy.

In the message of Glencore it says that the “Rosneft” shares will be sold at a premium price to CEFC, roughly 16% above the weighted average trading price of the securities over the last 30 days. This implies that the value of the transaction could reach about $9 billion. CEFC representative told Reuters that the deal amounts to $9.1 billion.

At this price CEFC would buy 14.2% of shares of “Rosneft” and this will be the largest direct investment of China in the capital of a Russian company. Until now the biggest deal was the purchase by Sinopec company “Udmurtneft” for $3.5 billion in 2006, as follows from the data of the project China Global Investment Tracker.

The sum of transaction looks inflated — premium of 16% to the market price unusual to buy a minority share, especially in the case of Russia with its climate, says Professor of Finance, University of Houston Craig, Pirrung, who followed the privatization of 19.5% of “Rosneft”. And the Chinese usually do not like to overpay. Pirrong is sure that the CEFC had to get something in return — for example, preferential terms of supply of Russian oil. “Rosneft” and the CEFC has indeed signed a long term contract for the supply of oil, reported the Russian company, but supply conditions are unknown.

 

The CEFC cannot be called a well-known Chinese company, but over the years it has evolved “from a niche fuel trader in the fast-growing oil and financial conglomerate,” as per Reuters in the beginning of this year. Annual revenue exceeds $40 billion.

The CEFC was founded in 2002 by its current Chairman Ye Jianming and believed to belong to him. But almost nothing is known about how the founder found the money for the rapid development of the business and how shares distributed  in the company. CEFC representative told Reuters that Ye Jianming owns the group through the shares in its subsidiaries, and not through a holding structure. “Although the company insists that it is private, its corporate structure facilitates the speculation that it is managed as a state organization,” says the Hong Kong edition South China Morning Post.

On the CEFC website says “unique” management model, the company combines “Trading Economics, Confucianism and Military management style.”

In early September, 2017 “Rosneft” has signed with the CEFC cooperation agreement for exploration and production of oil in Eastern and Western Siberia, as well as a contract for the supply of Russian oil. Press Secretary of “Rosneft” Mikhail Leontyev said that the company is discussing with the CEFC cooperation in the sphere of oil production and financing. “We are discussing with them the part in our major production projects in Eastern Siberia”, — said Leontiev. According to him, it is primarily on Greenfield projects (not yet developed oil fields), such as Suzunskoye field. “They have the ability to attract financing on acceptable comfortable conditions for us,” — said the press Secretary of “Rosneft”. The deal for the purchase of 14.2%, “Rosneft” “reflects the strong faith of the CEFC in high-quality resource base of “Rosneft”, competitive advantages in the industry and its management”, as per CEFC report.

The deal is not yet completed. It depends on the “completion of the final negotiations and the CEFC’s receipt of all necessary regulatory permissions”. For the approval of regulators and the closing of the transaction may take up to a month. Approval of the Russian government Commission on foreign investment is not required, specifies the partner of King & Spalding Ilya Rachkov, because under the foreign investment law it is not required, if in the course of transactions with foreign investors in the Russian Federation directly or indirectly retains control of the strategic enterprise.  In the CEFC press release, published on Friday evening, it says that the transaction “received the prior approval of the National Commission for development and reform of China,” but still need the approval of the “relevant government authorities”.

The owner of 19.5% of Rosneft, who sells 14.2% to the Chinese is QHG Oil Ventures registered in Singapore and controlled by a chain of British companies.

After completion of the transaction there will be three major foreign shareholders of “Rosneft” — British BP with a share of 19.75%, the CEFC (14,16%) and a consortium of Glencore and Qatar (QHG) with a share of about 5.3%. State “Rosneftegaz” owns slightly more than 50% of the shares. The share of Glencore will have an effective share in “Rosneft” in the amount of about 0.5%, while the share of QIA is 4.7%, according to Glencore.

Mr. Sechin said that “Rosneft” are pleased that the number of its shareholders would include a Chinese company. “For us this is a serious event, which generally forms the final shareholding structure of the company. We are glad that it was a Chinese Corporation”, — said the head of “Rosneft” in an interview with TV channel “Russia 24”.

Analysts of “Renaissance Capital” do not exclude that in the future the CEFC can sell their shares in “Rosneft” to other Chinese investors, “given the growing level of cooperation “Rosneft” with the Chinese oil and gas companies.

In June, Rosneft shareholders elected the Board of Directors of the new co-head of Glencore and President of research and development Ivan Glasenberg , and Qatar Foundation Faisal Alsuwaidi. Now on the Board of “Rosneft” there are nine Directors, but at the end of September shareholders will expand it to 11 people. Rights to nominate candidate to the Board of Directors appears already at 2% of the voting shares, but nominated a candidate must still be choosen.

 

Sechin explained that the main part privatized in late 2016 package “Rosneft” (19,5%) by consortium of Glencore and QIA purchased was with borrowed funds, but in recent year to repay the loan became too expensive. “Volatility in the financial markets has led to a serious devaluation of the dollar against the Euro, and the cost of servicing this loan has become quite serious. The consortium spent on the purchase of shares of “Rosneft” only €2.8 billion of its own funds (and Glencore only €300 million, but received a lucrative contract with “Rosneft”), the remaining €7.4 billion was provided by Italian Bank Intesa Sanpaolo (€5.2 billion) and certain Russian banks (€2.2 billion), which the parties to the transaction so still not revealed. Russian Bank deal could be with Gazprombank. And VTB Bank helped with the interim financing transaction, providing  €10.2 bn to the structure of Glencore for one week. This amount was transferred to “Rosneftegaz” and the Federal budget in 2016, but the closing of the transaction with Glencore and QIA had to wait until early 2017, when the promised funds were issued by Intesa. “Always thought that the deal to sell 19.5% of Rosneft to consortium QIA and Glencore were organized in haste, to catch, to privatize until the end of last year and the income from it went to the Federal budget”, — told Reuters a senior partner at a consulting firm.

Top-managers of Gazprombank and VTB in March 2017 has received awards from President Vladimir Putin for “strengthening Russia’s position in the global oil and gas industry and the successful implementation of tasks to improve the investment climate.”

Intesa “will be compensated” for a loan granted to the consortium. After the privatization of 19.5% of “Rosneft” this package as a whole was pledged to Intesa. Italian Bank tried unsuccessfully to syndicate a loan of €5.2 billion after its issuance (which in itself was unusual, because the syndicate is usually formed before loan). Western banks once again refused the deal because of new U.S. sanctions against Russia.

After receiving the money from the CEFC a consortium of Glencore and a whole QIA will send them to repay debt to Intesa and an unnamed Russian banks (€7.4 billion) and the payment of commissions and reimbursement of other expenses incurred in connection with the original transaction for the purchase of 19.5% of “Rosneft” (about €100 million), according to a source close to the consortium. Thus,  the consortium will not receive any profit from the sale of a package (except for dividends, collected from “Rosneft”). According to RBC, the consortium has received dividends on Rosneft shares for the year 2016 in the amount of 12.36 billion RUB. ($216 million at current exchange rates), of which for the stake going to the Chinese will be $157 million. Rosneft plans to pay interim dividends for the first half of 2017, the register closing date for dividend payout is October 10th, the owner of the 14,16% of the capital will receive 5.75 billion rubles ($100 million).

The conditions under which Glencore and QIA attracted credit resources for the purchase of shares of “Rosneft” have never been revealed (the cost of maintenance, time, etc.). The Deposit of shares after the repayment of the loan to Intesa, of course, will be lifted.

1 Comment

  1. CEFC has confirmed the participation of Russian banks in the transaction with the shares of “Rosneft”. CEFC will partially Fund the purchase of 14.2% of shares of “Rosneft” at the expense of loans of the Chinese and Russian banks, told representative of the company. “Chinese and Russian banks involved in the deal,” he said, but the name of specific banks and the potential volume of loans is not disclosed.

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