On Monday, Russian President Vladimir Putin signed off on the decree to merge Transneft and Transnefteprodukt within 5 months. The merger will be implemented by contribution to Transneft’s charter capital of 100% in Transnefteprodukt as part of the state’s payment for Transneft’s additional share issue. The state is to maintain at least 75% + 1 share in the merged company.
Interfax (Oil Information Agency) reported quoting a source familiar with the plans to take over Transnefteprodukt (TNP) that Transneft would have to issue not only common but also preferred shares in order to maintain its current equity structure. According to him, the amount of the additional share issue will depend on TNP’s valuation, which, according to preliminary data, is around Rub 35 bln ($1.35 bln). He went on to say that TNP’s additional valuation will be necessary to adopt the final decision on Transneft’s additional share issue.
At present, Transneft’s charter capital includes 75% of common shares (fully owned by the state) and 25% of prefs (owned by private investors and trade on the stock market. At present, the market price of Transneft is $2,090 per preferred share and the market cap of preferred shares is $3.25 bln. Since the company’s common shares are not listed, we can tentatively estimate market cap of common shares in proportion to their weighting in the charter capital – at $9.75 bln.
Transnefteprodukt is a monopoly in pumping oil products via pipelines. The RF government owns 100% of the company’s common shares. Market participants estimate the company’s price in the range of $1.3-1.5 bln, which is close to the valuation announced by the source quoted by Interfax.
Thus, in the event that the share swap ratios are set based on market valuations of Transneft’s prefs and preliminary valuations of Transnefteprodukt, Transneft would have to issue 13.3-15.4% of common shares. In the event that the information on additional preferred shares (in order to maintain equity structure) is also confirmed, Transneft will raise in the range of $436-500 mln as a result of a flotation on the stock market.
Overall, we view this development as upbeat for Transneft prefs, since as the company becomes larger and attracts additional capital, Transneft accumulates additional resources for large-scale investment programs (ESPO, BPS-2, etc.), while the increased number of preferred shares in free float could positively impact their liquidity. However, the official valuation of the both companies to be merged, which could throw light to parameters of the additional share issue, has not yet been released.
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