Gazprom to control coal and electricity markets

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MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - Russian energy majors Gazprom and SUEK said February 26 that they had agreed on the main terms for merging their power and coal assets.

The merger will create a $16 billion holding company, Russia's largest so far. The controlling stake (50% plus one share) will be held by Gazprom.

First Deputy Prime Minister Dmitry Medvedev, who heads the gas monopoly's board of directors, has already pointed out the new company's strategic goal, to hold a global IPO.

Gazprom had been negotiating the merger with the Siberian Coal Energy Company, or SUEK, for a year.

SUEK is the country's largest coal producer and one of the world's top ten in terms of coal production. Gazprom, too, is not only the world's largest gas producer: it now also controls impressive power generation assets it bought up during the reform of RAO UES, Russia's recently reorganized energy monopoly.

The negotiations became dragged out because Gazprom and SUEK had to agree on the value of their respective assets to be merged into the energy holding.

Eventually, each company's assets were evaluated at $8 billion. The SUEK management conceded the controlling stake to Gazprom, along with the majority of seats on the new company's board. The current SUEK owners, including beneficiaries Sergei Popov and Andrei Melnichenko, will keep the remaining shares.

Technically, the deal will be arranged as follows: SUEK will issue additional shares to raise $8 billion in favor of Gazprom and its subsidiaries, who will pay for the shares with stakes in power generating companies owned by Gazprom. The deal will be closed before August 31.

The resulting bundled company will be Russia's largest energy holding, encompassing power plants accounting for 15% of Russia's electricity market, and 5.8 billion metric tons of coal reserves with annual production potential of around 90 million metric tons.

However, many independent experts believe the SUEK management sold its assets too cheap, especially in the light of the current rapid rise in coal prices.

Another natural question would be whether it was worthwhile reforming RAO UES only to see the new "old" monopolies occupying the niche it has just vacated. In addition to a large share of the power generation market, Gazprom will also control two key types of fuel, gas and coal.

But, what is done, is done. Gazprom chairman Dmitry Medvedev, who is widely expected to win Russia's presidential election on Sunday, praised the merger and outlined a strategy for SUEK's development.

"I hope in the end we will have another strong company that will hold an IPO," he said. The deal is for "the good of Gazprom shareholders, for the good of the country, and for the good of SUEK shareholders," he was quoted as saying.

SUEK director general Vladimir Rashevsky, who will keep his post, said the public offering of up to 25% of the company's stock could be held in 2008-2009. SUEK will need the IPO to raise money for its large investment program.

According to some estimates, if the projected IPO is a success, the new company's capitalization could reach $20 billion. SUEK shareholders could win after all, despite giving up control of their company for free.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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