Russian Fund Contests Kremlin Grab for Oil-Pipeline Payouts

Updated on
  • UCP filed lawsuit in March, says Transneft payouts are illegal
  • Energy Minister Novak announced dividend breakdown on Friday

United Capital Partners, an asset manager led by one of Russia’s most prominent deal makers, is ready to escalate its fight against the government’s swoop for a bigger share of the national oil pipeline company’s profit.

For the second time in three years, AK Transneft OJSC will favor the state, owner of the company’s ordinary stock, over holders of preferred shares such as Moscow-based UCP. Transneft is set to pay a dividend of 2,077.08 rubles ($32.57) for each ordinary share, two-and-a-half times the 823.30 rubles earmarked for preferred shareholders, according to the Energy Ministry.

UCP says the different treatment of preferred and ordinary shares is “illegal and unfair," and in March filed a lawsuit over Transneft’s 2013 dividend, the only other time the government took a bigger payout. The spat over dividends pits UCP and its president Ilya Sherbovich, who’s helped craft deals for people close to Vladimir Putin, against the management of Transneft and a government trying to weather what’s shaping up to be the longest recession in two decades. 

“Basically you’ve got two groups, loyal to the Kremlin, fighting with each other,” said Sergey Vakhrameev, a money manager at GL Financial in Zurich, which oversees about $100 million in assets. “So far UCP is losing the battle against Transneft on dividends.”

Next Move

UCP, which started investing in Transneft in 2006, declined to say how many preferred shares it holds. Transneft’s Jan. 20 statement that the fund held 1.1 million shares, or about 70 percent of the total, was false, according to UCP.

“Transneft’s transparency is really important for its market value,” said Mikhail Trofimov, a partner at UCP, in an interview at the fund’s Moscow office. “The company’s attitude towards its shareholders remains unfriendly."

The fund will wait for Transneft’s board to confirm the 2015 dividend at a June 9 meeting before deciding on its next step, Irina Lanina, a spokeswoman for UCP, said on Monday.

Energy Minister Alexander Novak said on Friday that Transneft will pay 10 percent of its profit under Russian accounting standards to preferred shareholders, with 90 percent going to the government. That’s in line with the company’s 1996 charter, which allows unequal payouts for different classes of share, Transneft spokesman Igor Dyomin said on Monday.

Defining Dividend

“It’s not Transneft but the state as the main shareholder that defines and orders the size of the dividend payment for preferred shares,” according to Dyomin.

While Russia instructed state companies in April to pay out at least half of their profit under domestic or international accounting standards -- whichever is higher -- to help plug its budget deficit, Transneft has sought to pay a smaller dividend. Instead of paying out half of its 142.8 billion-ruble profit under international standards, the pipeline company will pay just 12.8 billion rubles, its entire earnings under Russian accounting standards.

“If a company like Transneft doesn’t want to pay dividends, it’ll find an excuse
not to pay them,” Vakhrameev said. “No reasonable investor is going to buy these shares.”

Russian Spies

Transneft has long been used as a cash cow to fulfill the Kremlin’s ambitions for big-ticket projects, such as Russia’s first oil pipeline to China. Wooing minority shareholders hasn’t been a priority and since 2004, dividends paid on preferred shares have slumped 26 percent. In 2011, Transneft CEO Nikolay Tokarev said he saw no reason to pay higher dividends to “feed three people” who hold the company’s preferred shares.

A number of investors sold their preferred shares after Transneft donated 3.2 billion rubles to charities and projects favored by the Kremlin in 2011. That largess extended to an aquarium and a group that helps retired Russian spies.

UCP is considering accumulating, either on its own or in partnership with other shareholders, at least 75 percent of Transneft’s preferred stock, which could allow it to change the company’s capital structure, according to Trofimov. 

The fund denied a report on Monday in RBC newspaper that it was planning to sell its $2.9 billion stake, following an offer by Transneft in December. Buying back preferred shares doesn’t make sense, said Transneft spokesman Dyomin.

Accounting Switch

UCP said Transneft is currently undervalued, after the shares fell 19 percent over the past four weeks. Still, for those able to stomach Transneft’s rollercoaster ride, the shares have almost quadrupled over the past five years, making the stock the best performer on the benchmark MICEX Index. The shares climbed 2.9 percent as of 4:08 p.m. in Moscow.

UCP hopes the returns could be even greater, if Transneft and its backers in the Kremlin take a little more notice of minority shareholders.

“If Transneft switches to dividend payouts based on international accounting standards, the company will become much more interesting for investors and its value will rise,” said Trofimov. “All shareholders will profit.”

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