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Sistema Buys Into Bashkir Energy

Consumer services giant Sistema said Friday that it had spent $503 million buying minority stakes in seven energy companies in Bashkortostan. The deal appeared to be a sharp departure from the group's telecoms focus just months after it raised $1.6 billion on the London Stock Exchange.

The deal, in which Sistema acquired 20 percent stakes in six regional energy companies and a 10 percent stake in power company Bashkirenergo from a firm believed to be owned by Bashkir President Murtuza Rakhimov's son, raised eyebrows among investors.

Sistema's London-listed shares fell 0.9 percent on the news it had bought the stakes from Bashkir Capital, Reuters reported, amid concerns about the investment being outside the company's usual area of expertise and continuing legal questions over the assets' privatization.

Under the deal, Sistema bought 19.9 percent of the Novoil, Ufa Oil and Ufaneftekhim refineries; 20 percent of Bashneft and petrochemical company Ufaorgsintez; 19 percent of oil distribution network Bashnefteprodukt; and 10 percent of Bashkirenergo.

"It's a disgrace," said one London-based manager at a major investment fund, who spoke on condition of anonymity. At the time of the initial public offering in February, "they had already divested themselves of noncore assets and this was a business focused on consumer services. Everyone knew the funds raised were meant to be used either on Svyazinvest or for Deutsche Telekom, and then they go and spend it on a ragbag of what's been essentially the worst energy assets in Russia."

But other analysts and investors said the entry of Sistema, which is majority-owned by powerful Moscow oligarch Vladimir Yevtushenkov, into the Bashkir energy market could help boost the companies' value, not least because Sistema could provide added political protection to assets that have been under threat of renationalization.

"By having such a powerful ally as a shareholder, you gain an additional degree of protection," said Steven Dashevsky, head of research at Aton brokerage. "Because of the legally questionable nature of some of the assets, this could be a major plus."

Yevtushenkov told investors in a conference call Friday that the acquisition was not a departure from the group's telecoms focus. He said it was a purely for-profit financial investment while Sistema waited for the long-delayed privatization of Svyazinvest, the fixed-line telecoms monopoly, which is now not expected until next year. Sistema planned to spend another $100 million on boosting its presence in the seven companies to blocking minority stakes, he said.

Yevtushenkov said the stakes had been bought at a 17.6 percent discount on the current market price and that Sistema planned to divest from the companies in 18 to 24 months, after integrating the assets into a single, more efficient, holding. "This deal is purely financial. We regard it as a good opportunity to increase shareholder value in a short space of time," he said.

Until now, Sistema has largely focused on the telecoms and consumer services sector, with its majority stake in the country's leading cellular provider, Mobile TeleSystems, its largest asset. It sold on its minority stakes in the energy business several years ago to focus on its core business ahead of the London IPO, the largest ever by a Russian company.

Now, however, Sistema has stakes in companies that have been the subject of months of court wrangling over their sudden privatization in 2003. In a series of murky transactions, shares in the companies held by state-controlled Bashkir Fuel were transferred to Bashkir Capital, a company widely believed owned by Rakhimov's son Ural.

The Bashkir leader has come under significant political pressure this year.

Prosecutors in Bashkortostan have launched a series of investigations into the transfers and won court rulings ordering Bashkir Capital to hand the shares back to the state. Those rulings, however, were overturned in June.

Even though the June decision lifted a freeze on transactions involving the shares, the sale to Sistema could still be disputed, Bashkir Prosecutor's Office spokeswoman Gulnara Bikbulatova said Friday, Interfax reported.

The prosecutor's office will make a decision in the next few days about whether the sale was legal or not, Bikbulatova said, Interfax reported.

She said prosecutors were still preparing appeals against the latest ruling, with one hearing possibly to be held at the end of August.

A source in the Bashkir government said that the Sistema deal was "an attempt to hide the traces of Bashkir Capital's illegal privatization of state property and to complicate the legal proceedings to return the property to the state," Interfax reported Friday.

Sistema, however, was confident that its right to the stakes was solid and would not be challenged.

Yevtushenkov told investors that the investment risk was "exaggerated."

"You always get risks in big deals like this," he said. "You get a good return on such risky deals. I assure you we studied the deal very carefully before going through with it."

Sistema's head of capital markets, Andrei Bliznyuk, said the company expected no challenge to the deal. "We feel that our property rights are sufficiently protected in the current legal environment," he said by telephone Friday.

Bliznyuk said Sistema had spent time conducting due diligence on the acquisition, which he said was "a confidential process."

He said that he was unable to disclose who the owner of Bashkir Capital was. Bashkir Capital could not be reached for comment.

"There's no certainty about whether the Svyazinvest privatization will happen in the near future. We thought it was more appropriate to use our funds to invest in this project, which offers high returns for investors instead of leaving cash sitting around in bank accounts," Bliznyuk said.

It was not clear how much cash Sistema had available following its Bashkir buy. Bliznyuk said he could not disclose Sistema's current cash balance.

During the conference call, Yevtushenkov said Sistema still intended to participate in the privatization of the state's 75 percent stake in Svyazinvest, and that Sistema could raise additional financing next year for its bid. He said Sistema remained in talks with Deutsche Telekom about buying out the German company's 10 percent MTS stake, which is currently valued at $1.5 billion.

Investors said that they were still concerned, even if the energy buy did not distract Sistema from its telecoms strategy. "They can justify this by saying they'll make money from it. But for a company worth more than $10 billion, they're only going to earn another $100 million or so. Their cost of capital, meanwhile, is going to go up," said the London-based fund manager. "They've ruined their reputation for nothing."

Kommersant on Saturday speculated that the Sistema move was aimed at heading off a rival bid for the assets from state-owned Rosneft, whose chairman is senior Kremlin aide Igor Sechin. The paper cited a source close to the Bashkir leadership as saying that Kremlin chief of staff Dmitry Medvedev had organized the Sistema deal. Medvedev is chairman of Gazprom, which has been vying with Rosneft for energy assets.

A Rosneft spokesman did not deny the company was interested in the Bashkir assets, the paper said.

(WBJ 15.viii.05)

 
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