Analysis-Investors outraged, state cool on Lukoil Repsol bid

Friday, Dec 05, 2008

Russian oil major LUKOIL could not have chosen a worse timeto bid for Spain'sRepsol as it not only lacks money and visible Kremlin support but it has alsoangered its usually loyal small investors.

Yahoo! BuzzMinority investors in Russia'slargest private oil firm say they are outraged at the potential purchase of astake in Repsol for up to 10.7 billion euros ($13.49 billion) and would rathersee the firm investing in its own stock or production at home.

Russia'slargest private oil producer has long been pursuing expansion abroad as a movethat would not only help it rival global majors but also give it a biggerdiplomatic role in a resurgent and increasingly assertive Russia.

But aside from the opposition it could face from Spanishpolitical circles, LUKOIL's expansion abroad is at the bottom of the Kremlin'slist of priorities.

The government is preoccuppied with holding on to thebillions of dollars it needs to keep economy afloat, support the rouble andhelp state-owned giants refinance foreign debts.

""It is a very dangerous deal,"" saidIvan Mazalov from Prosperity Capital Management. ""When Russiancompanies are writing down losses from their overseas investments it would bewise for LUKOIL to buy its own stock rather than do such a deal.""

Comment On This Story Mazalov, who helps manage $2 billionincluding a ""big minority stake in LUKOIL"", said hewished LUKOIL was better managed in Russia:""If you add assets in places like Argentina,it will become even tougher to manage the company"". Zina Psiola,head of emerging markets at Clariden Leu, says he finds it hard to see anysynergies from the deal and that Repsol looked over-priced.

""Investors should not be fooled by the fact thatLUKOIL is negotiating with Spanish banks for a ten billion plusloan,"" said Psiola, whose fund divested its LUKOIL stake this year.""When things get tough as they already did this autumn we know thatthey (LUKOIL) will come and lobby hard to get the Russian government to bailthem out either in form of reduced taxation and/or refinancing"".

""Hence, de-facto LUKOIL intends to do anacquisition at the expense of Russian budget and country's pensionsystem."" Elena Loven, who manages the Swedbank Russian fund, saysshe thinks the deal could be value destructive for LUKOIL. ""LUKOILwill be forced to cut its capex due to credit problems and poor cash-flows inan environment of lower oil prices,"" she said.