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Transneft Investors Petition Putin to Sell 25% of Common Stock

OAO Transneft shareholders wrote to Russian Prime Minister Vladimir Putin asking him to sell 25 percent of the oil pipeline monopoly’s common stock, according to a letter e-mailed by investor Prosperity Capital.

Prosperity and East Capital, Russia’s two largest portfolio fund managers, and Vostok Nafta, a commodity investment manager, said the government may raise 150 billion rubles ($4.9 billion) selling the stake, according to the letter dated Aug. 6. The three hold 21 percent of Transneft’s preferred shares. The state owns all the common stock, with voting rights.

“If we have more clarity about what the government plans to do with Transneft privatization it could lead to a transformation,” said Denis Evstratenko, associate director at Prosperity Capital, which has $4 billion in assets under management. “It could become a proper company with investor meetings, regular phone calls with analysts, a dividend policy and its price to earnings would then catch up on its peers.”

Transneft preferred shares now trade at a price to earnings ratio of 1.4, compared with 4.7 for common stock of OAO Gazprom, the gas export monopoly, according to Bloomberg data.

Limiting a sale to 3 percent of Transneft’s share capital would damage the price and the stock’s liquidity, according to the letter, signed by Prosperity Chief Investment Officer Alexander Branis, East Capital partner Jacob Grapengiesser and Vostok Nafta’s Per Brilioth. Such a sale would leave the state with 75 percent of total equity, while the proposed sale would cut its interest to 75 percent of voting rights.

Strategic Assets

The Finance Ministry said last month Russia may raise 883.5 billion rubles to help cover its budget deficit by selling minority stakes in 10 companies, including Transneft and OAO Rosneft, the country’s largest oil producer, in the next three years.

Transneft is a strategic asset for Putin’s government, shipping most of the country’s oil exports and building routes to boost supplies to China and the Pacific or bypass transit nations, such as Belarus.

At least three obstacles stand in the way of a state sale of Transneft stock, Igor Dyomin, a spokesman for the pipeline company, said by telephone today from Moscow. Putting a blocking stake in the hands of an oil producer may create an uneven playing field for pipeline access, he said.

A decrease in state ownership could trigger a rating downgrade, raising the cost of borrowing, Dyomin said. An ownership change may also breach bond covenants and trigger repayment, he said.

Dyomin declined to comment directly on the letter, saying he hadn’t yet seen it. Evstratenko said Putin’s office had yet to reply to the letter.

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