Affiliated Party Transactions Examples at Gazprom

18
1 HERMITAGE CAPITAL MANAGEMENT Affiliated Party Transactions Examples at Gazprom William Browder Chief Executive Officer Hermitage Capital Management November 12, 2004

description

Affiliated Party Transactions Examples at Gazprom. William Browder Chief Executive Officer Hermitage Capital Management November 12, 2004. Construction write-off ($889) m. Construction write-off ($694) m. Profit. Profit. Loss. Construction write-off ($1,052) m. Stroytransgaz Example. - PowerPoint PPT Presentation

Transcript of Affiliated Party Transactions Examples at Gazprom

Page 1: Affiliated Party Transactions Examples at Gazprom

1

HERMITAGE CAPITAL MANAGEMENT

Affiliated Party TransactionsExamples at Gazprom

William BrowderChief Executive Officer

Hermitage Capital ManagementNovember 12, 2004

Page 2: Affiliated Party Transactions Examples at Gazprom

2

HERMITAGE CAPITAL MANAGEMENT

Construction write-offs had materially hurt the profitability of Gazprom

Source: PWC Audit of Gazprom 1998-2000

$4,659 m

$946 m

increase by 19%

increase by 73%

($4,151) m

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

1998 1999 2000

mln USD

Impairment charge for Assetsunder construction, mln USD

EBIT, mln USDdecrease by 25%

Loss

Construction write-off

($1,052) m

ProfitProfit

Construction write-off ($694) m

Construction write-off ($889) m

Stroytransgaz Example

Page 3: Affiliated Party Transactions Examples at Gazprom

3

HERMITAGE CAPITAL MANAGEMENT

45% 47% 49%

0%

20%

40%

60%

80%

100%

120%

1998 1999 2000

Stroytransgaz Example

A company called Stroytransgaz had been contracted to do largest share of Gazprom construction

Source: PWC Audit of Gazprom 1998-2000, Stroytransgaz prospectus

Stroytransgaz

Page 4: Affiliated Party Transactions Examples at Gazprom

4

HERMITAGE CAPITAL MANAGEMENT

It appeared that there was a strong correlation between Gazprom write-downs and services provided by Stroytransgaz

$1065.9 m

$676.3 m

$842.0 m

$1052 m

$694 m

$889 m

0

200

400

600

800

1,000

1,200

1998 1999 2000

mln USD

Stroytransgas services, mln USD

Impairment charge for Assets under construction, mln USD

Source: PWC Audit of Gazprom 1998-2000, Stroytransgaz prospectus

Stroytransgaz Example

Page 5: Affiliated Party Transactions Examples at Gazprom

5

HERMITAGE CAPITAL MANAGEMENT

Furthermore, in 1995 Stroytransgaz had been basically given 4.83% of Gazprom

Source: Gazprom and Stroytransgaz securities reports

G azp ro m S tro y tran s ga z4 .8 3 % o f G azpro m

$ 2 .5 m il l io n

Stroytransgaz Example

Page 6: Affiliated Party Transactions Examples at Gazprom

6

HERMITAGE CAPITAL MANAGEMENT

$191 mln

$1,087 mlnLoss of

$1085 m

$2.5 mln0

200

400

600

800

1,000

1,200

Price paid byStroytransgaz

Market value of theblock in 1995

At Market Price(May 14, 2002)

Gazprom loss

Million USD

Source: Gazprom and Stroytransgaz securities market reports, Plan of Privatization, Reuters, Vedomosti

Valuation of 4.83% Gazprom shares block “sold” to

Stroytransgaz

Stroytransgaz ExampleThat gift transferred huge value away from Gazprom

Page 7: Affiliated Party Transactions Examples at Gazprom

7

HERMITAGE CAPITAL MANAGEMENT

57.04% of Stroytransgaz

V ic to r C herno m yrd in( f o r m er C h air m an o f th e Bo ardan d f o r m er C E O o f G azp ro m )

An d r e iC h er n o m y r d in

Vita lyC h er n o m y r d in

s o ns

5.96% ofS troytra ns ga z

5 .96% ofS troytra ns ga z

R em V yakhirev( f o r m er C h air m an o f th e Bo ard

an d C E O o f G azp ro m )

T aty an aD ed ik o v a

6.40% ofS troytra ns ga z

daughte r

A rngo lt B ekker( M em b er o f th e Bo ard o f

G azp ro m )

V.Bek k erN . Bek k er

c hildre n

6.99% ofS troytra ns ga z

2 .65% ofS troytra ns ga z

E .Bek k er

2.68% ofS troytra ns ga z

V yac hes lav S herem et( M em b er o f th e Bo ard an d f ir s t

d ep u ty o f C E O o f G azp ro m )

Ko rm an o v s k i A.

6.40% ofS troytra ns ga z

kin

20.00% ofS troytra ns ga z

Through the affiliated party disclosure it was discovered who truly owned Stroytransgaz

Source: Gazprom and Stroytransgaz securities reports

Stroytransgaz Example

Page 8: Affiliated Party Transactions Examples at Gazprom

8

HERMITAGE CAPITAL MANAGEMENT

As a result of the public pressure, 4.83% of its shares were returned to Gazprom

Source: Interfax, November 27, 2002, Vedomosti, March 12, 2003, Preliminary Offering Circular February 14, 2003, Loan Participation Notes

G a zp rom

S tro ytra n s g a s

J o in t V e n tu r e

V e k s e ls w o rth$ 1 4 4 m ln .

4 .8 3 % o fG a zp ro m 's s h a re s

G a zp rom

S tro ytra n s g a s

J o in t V e n tu r e

4 .8 3 % o fG a zp ro m 's s h a re s

V e k s e ls w o rth$ 1 4 4 m ln .

S ta g e 1 : S ett in g u p J V S ta g e 2 : L iq u id a tio n o f J V

Stroytransgaz Example

Page 9: Affiliated Party Transactions Examples at Gazprom

9

HERMITAGE CAPITAL MANAGEMENT

Stroytransgaz has also seen its share in Gazprom’s construction budget decline

Source: Gazprom disclosure

Stroytransgaz Example

Share of Stroytransgas in Gazprom's construction business (1998-2003, %)

21%

26%

51%49%

47%45%

0%

10%

20%

30%

40%

50%

60%

1998 1999 2000 2001 2002 2003

Page 10: Affiliated Party Transactions Examples at Gazprom

10

HERMITAGE CAPITAL MANAGEMENT

Source: Hermitage Analysis, Federal Securities Market Commission

After the 1998 crisis, Gazprom decided to acquire gas retailers (about 80) by swapping their debt for equity and creating a holding company RegiongasHolding

But surprisingly

Gazprom only received 25% of the

new holding company

G a zp ro m

M e zhre gio nga s

C u sto m ers

1 0 0 %

B ry a ns o b lga s

K a lu ga o b lga s

T y u m e no b lga s. . .

G a s re ta ils a le s

R e g io n g a s H o ld in g

2 5 %

3 o u ts id e c o m p a nie s

7 5 %

80 retailers

G a zp ro m

M e zhre gio nga s

C u sto m ers

1 0 0 %

G asw ho les alers

B ry a ns o b lga s

K a lu ga o b lga s

T y u m e no b lga s. . .

G a s re ta ils a le s

RegiongasHolding Example

Page 11: Affiliated Party Transactions Examples at Gazprom

11

HERMITAGE CAPITAL MANAGEMENT

Source: Hermitage Analysis, Federal Securities Market Commission

Instead of Gazprom owing RegiongasHolding, 75% of it ended up in the hands of former management of Gazprom and Mezhregiongaz

Regiongas Holding shareholders

structure

Mezholimpinvest20%

Gazspetztehnologia25%

Resurs-MRG30%

Gazprom25%

P ro te k -M G

V ita ly C h e rn o m yrd in ,s o n o f fo rm e r C ha irm a n

o f G a zp ro m

1 0 0 %

A gro him te x

Q u o ru m -N D e lta

5 0 % 5 0 %

V a le n tin N ik is h in ,C E Oo f M e zhre gio nga z a nd

his s o n

1 0 0 % 4 8 %

4 5 %4 5 %

RegiongasHolding Example

Page 12: Affiliated Party Transactions Examples at Gazprom

12

HERMITAGE CAPITAL MANAGEMENT

Regiongasholding Ownership Evolution

Gazprom; 25%

Gazprom; 55%

Mezholimpinvest 20%

Resupr-MRG; 30%

Gazspetztehnologia, 25%

Others45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002

As a result of public pressure, Gazprom recovered control over RegiongasHolding

Source: Federal Securities Market Commission, Regiongasholding 4Q 2002 securities market report

RegiongasHolding Example

Page 13: Affiliated Party Transactions Examples at Gazprom

13

HERMITAGE CAPITAL MANAGEMENT

First dilutive issue took place in July 1997.

Gazprom40%

Gazprom45%

Proekt (SBNG management)15%

Proekt (SBNG management) 15%

LogoVaz20%

Local administrations 8%

LogoVAZ 20%

ZAO "Schit" 10%

"Potential LO" 6%

Local Administrations 20%

0

1,000

2,000

3,000

4,000

5,000

6,000

May-95 Jul-97

150% capitalincrease

Placement price valued Sibneftegaz at $1,285 K

2,000 shares

5,000 shares

Gazprom underpaid$65 K needed to keep

its share intact

3,000 new

shares$777 Kworth

Sibneftegaz Example

Page 14: Affiliated Party Transactions Examples at Gazprom

14

HERMITAGE CAPITAL MANAGEMENT

Second issue bring Gazprom down to only 21% to the benefit of two Itera affiliated companies (38%) and Ingeneeringoil (5%) owned by Vyakhirev kins.

Gazprom45%

Gazprom21%

Proekt (SBNG management) 15%

Proekt (SBNG management)15%

LogoVaz 5%

LogoVAZ 20%

Local administrations 2%

ZAO "Schit" 10%

"Potential LO" 1.8%

Lanka Promkomplekt 18%

Linko-Optim 20%

Puringeneeringoil 5% OOO Krifin 2%

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

Jul-97 Feb-99

"Potential LO" 7%ZAO "Schit" 10%

Local Administrations 8%

20,000 shares

5,000 shares

300% capitalincrease

Gazprom underpaid$333 K needed to keep

its share intact

Placement price valued Sibneftegaz at $1,751 K

15,000 new

shares$1314 Kworth

Sibneftegaz Example

Page 15: Affiliated Party Transactions Examples at Gazprom

15

HERMITAGE CAPITAL MANAGEMENT

Sibneftegaz intrinsic value is between $78 mln and $627 mln based on 1.57 BOE of hydrocarbon reserves

Sibneftegaz valuation

$1.8 mln

$78.4 mln

$627.2 mln

$0

$100

$200

$300

$400

$500

$600

$700

Last share issue (Feb-99) Based on Gazprom $/boevaluation

Based on average Russian $/boevaluation

Mill

ion

US

D

Sibneftegaz Example

Page 16: Affiliated Party Transactions Examples at Gazprom

16

HERMITAGE CAPITAL MANAGEMENT

Gazprom management related parties benefited from Gazprom dilution

20%

9%

15%

5%10%

10%

13%

18%

Se r g e iSo c hne v

Yur iR yazano v

O O O"Vis ta-K o ral l"

O O O "K r if in"

O O O "Inte rgazs ib"

O O O "L inko -o ptim "

1 0 0 % 1 0 0 %

1 0 % 9 0 %

1 0 0 %

O O O "L anka-P ro m c o m ple c t"

7 5 %

Vi c to r B r yans ki hD e pa rtm e nt of

S tra te gic D e ve lopm e nt ofG azp ro m

L e s yaSo ko l o va

1 2 .5 %

1 2 .5 %

20%

1 8 %

G a zp ro m2 1 %

Z AO Ins uranc eC o m pany "Sc hit"

1 0 %

Z AOP ure nge ne e r ingo il

G e nady Vyakhi r e vbro the r o f R e m Vyakhi r e v

G azpr o m C E O

Andr e y Vyakhi r e vne phe w o f R e m Vyakhi r e v

G azpr o m C E O

Z AO Firm a P ro e kt

O the rs

1 5 %

7 0 % 3 0 %

V ya c he s la v K uzne tzo vH e ad o f Inte rnal Audit

D e par tm e nt o f G azpr o m

4 2 %

N atal i eKuzne tzo va

M r .Kuzne tzo vs po us e

4 7 %

S ib ne fte ga z

5%

1 3 %

Sibneftegaz Example

Page 17: Affiliated Party Transactions Examples at Gazprom

17

HERMITAGE CAPITAL MANAGEMENT

May '01: Putin sacks Rem Vyakhirev as CEO of Gazprom.

Source: Bloomberg

Gazprom Share Price (US$)

Sibneftegaz ExampleIn light of these and other discoveries, president Putin fired Gazprom’s CEO Rem Vyakhirev

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01

Page 18: Affiliated Party Transactions Examples at Gazprom

18

HERMITAGE CAPITAL MANAGEMENT

Disclaimer

The information is based on data obtained from publicly available sources, which have not been verified by Hermitage Capital Management Limited, or any of its respective associates or affiliates. As a result of the difficulty in obtaining reliable data in Russia, we do not represent this information to be accurate and complete and we do not accept any responsibility for the reasonableness of any conclusions based upon such information.