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BP, Rosneft enter talks about TNK-BP

by Paul Whitfield | Published July 24, 2012 at 9:25 AM

BP plc and OAO Rosneft Tuesday, July 24, said they plan to start talks about the sale of BP's 50% stake in TNK-BP Ltd., muddying the waters for the venture's co-owner, Alfa-Access-Renova, and paving the way for a deal potentially worth more than $25 billion.

The surprise announcement complicates discussions between AAR and BP which began last week. The Russian holding company, led by billionaire Mikhail Fridman, is hoping to either buy half of BP's stake in the joint venture or interest BP in a proposal to buy the 50% it doesn't own of TNK-BP for cash and BP shares, according to a source with knowledge of AAR's plans.

Analysts estimate BP's 50% stake in TNK-BP could be worth at least $25 billion. BP put the holding on the block on June 1, saying it had received unsolicited approaches. Rosneft Tuesday became the first external TNK-BP suitor to step forward. It wasn't clear whether other bidders remain in the frame.

TNK-BP accounts for about 30% of BP's production and reserves, while its roughly $3.8 billion in annual dividends equates to about 20% of the British company's earnings.

"Rosneft believes that an acquisition of BP's interest in TNK-BP would be in the best interest of both Rosneft's and BP's shareholders and would lead to further development of TNK-BP," the Russian oil company said. "The parties agreed to commence negotiations on this matter and signed a nondisclosure agreement."

BP and Rosneft in 2010 agreed to swap shares and launch an Arctic prospecting joint venture before they were forced to drop the plans due to opposition by AAR. BP owns 1.5% of Rosneft and the two companies also jointly operate a German refining business.

Under the terms of a shareholder pact between BP and AAR, the British company must conduct negotiations "of good faith" with AAR for 90 days before making a decision on its TNK-BP stake. That period began on July 19, when AAR, which is backed by a group of Russian-born billionaires, said it wanted to begin negotiations to buy all or part of BP's stake in the JV.

"While conducting parallel discussions with Rosneft and any other interested parties, it [BP] will negotiate in good faith with Alfa-Access-Renova in accordance with its legal obligations," BP said.

Those negotiations are sure to be tense. Relationships between the partners have broken down to such an extent that they can't agree on a replacement director for former German Chancellor Gerhard Schröder, who quit because of the conflict between the two groups.

Analysts including Citigroup Inc.'s Alastair Syme and Michael Alsford noted that BP will likely be reluctant to issue new shares at current levels to fund a purchase of more of TNK-BP, while the sale of half of its stake in TNK-BP will leave it with a minority holding that would be difficult to sell.

RBC Capital Markets analyst Peter Hutton Tuesday put a $29 billion valuation on BP's 50% TNK-BP holding.

"However, we also believe that any deal, is likely to involve some form of continued investment in Russia, perhaps through a JV with Rosneft. ... We assume that half of BP's after tax funds would be reinvested in Russia, and half repatriated," he wrote.

Both BP and Rosneft declined to name their advisers.

Shares in BP traded Tuesday at 433.8 pence ($6.75), up 3.25 pence, or just under 1% on their previous close. Shares in Rosneft traded at 199.6 rubles ($6.15), marginally higher than their previous close.

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