Petromidia - back and forth

• The alternative of the Romanian state becoming a majority shareholder in the refinery is a cause of concern for the Kazakhs

• By spending 11 million Euros, the Romanian government would increase its chances of getting back the 571 million Euros it is owed by the "Rompetrol" refinery

• The refinery could be delisted before the debt gets paid

• What could stop Dinu Patriciu from becoming a majority shareholder in Petromidia?

• KazMunayGas officials say they are interested in keeping the majority stake in the refinery

11 million Euros.

This seems to be the price that the Romanian government would need to pay now in order to make sure its gets back the 570 million Euros in debt that it is owed by the former Petromidia refinery.

How?

By forcing the takeover of the controlling interest in the refinery.

In 2008, KazMunayGaz made a strong commitment, that upon maturity it would pay in full the 570 million Euros that "Rompetrol Rafinare" (formerly Petromidia) owes the Romanian state. Blaming the economic crisis, which has reached even the profitable oil business, the company now seems reluctant to honor this agreement.

Only six months are left before the bonds issued against the company"s debt to the state reach maturity, and the alternatives for paying back the debt are already causing tension in the negotiations between the Romanian authorities and the Kazakh group, which acquired the refinery two years ago from Romanian businessman Dinu Patriciu.

After Traian Băsescu recently visited Kazakhstan, PM Emil Boc said that one of the alternatives considered by the government would be to become the majority shareholder in the company again. The PM also said it would use all legal means at its disposal to recover the amounts owed by the company. The Kazakhs" reply came on Friday: "We are willing to keep the majority stake of more than 50% in Rompetrol Rafinare, even after the company"s debt towards the state comes to maturity in September".

The law allows "Rompetrol Rafinare" to buy back its bonds in September 2010 when they reach maturity, or to convert them into stock.

Which gives the Kazakh group the upper hand in the negotiations with the Romanian authorities.

The scenarios which have been thrown around lately seem to indicate that the Romanian government is looking to improve its odds in the negotiation, going as far as to threaten with a takeover of the refinery. Which poses quite a problem for the Kazakh group, which invested over 1.6 billion Euros in acquiring control of the refinery located on the Black Sea.

The service of the debt is the responsibility of the refinery, which issued the bonds in 2003 in exchange for its outstanding debt to the state budget, and not that of the majority shareholder.

The Kazakh group is currently in the process of acquiring the outstanding shares of "Rompetrol Rafinare" from the stock market, after the Romanian Securities Commission (CNVM) forced it to make a public takeover offer. Which means the Kazakh company would need to spend an additional EUR 90 million this year.

Once the takeover bid expires, two weeks from now, KazMunayGaz could control more than 95% of the company, which would allow it to delist "Rompetrol Rafinare", and turn it into a private company.

Depending on the evolution of the Euro /leu exchange rate, the Romanian state could own 48 to 51% in the company again. In order to make sure it acquires the majority stake, which the Kazakh company will do its best to prevent it from, the Romanian government would need to start buying up to 3% of the company"s shares as soon as possible.

With the 11 million Euros it would need to acquire the majority stake, the Romanian government would partially protect itself against the foreign exchange risk which threatens the value of its future stake in the company, in case the Kazakh group fails to honor its commitment to buy back the refinery"s bonds.

• What the Kazakh group wants

The amount that KazMunayGaz will need to spend this year, in order to pay back the outstanding debt of Rompetrol Rafinare towards the state as well as to complete the takeover bid, is close to 700 million Euros (including the coupon for 2010).

The amounts seems rather small when comparing it to the amount it allegedly paid to acquire the company from Dinu Patriciu - 1.6 billion Euros in exchange for his 75% stake in the "Rompetrol" group.

But the economy was different then.

Today, with the economic crisis in full swing, even a smaller amount becomes a much bigger burden.

The price paid by KazMunayGaz two years ago was justified by the fact that the Kazakh group was not only buying a refinery, but also a gateway to Europe, located on the Black Sea, which would allow it to transport its crude oil and natural gas by going around Russia.

The strategic value of the refinery was the decisive factor in setting the price of the transaction, which was completed discretely in 2007. Even though they are not responsible for the debt to the state budget that the company has incurred, the Kazakhs took it on by acquiring the refinery from Dinu Patriciu. The end price of the transaction most likely included the payment of the company"s debts to the state.

Strategically, things haven"t changed since 2008, meaning that from this point of view, it"s still in the best interest of the KMG group to increase its stake in the company and to buy back the bonds issued by the refinery in exchange for its debt to the Romanian state.

In order to do that, the Kazakh group has a choice between performing a share capital increase, or taking a bank loan (a possibility it leaked to the press).

The takeover bid that the company was forced to make by the CNVM, according to the law, gives KMG the advantage, by allowing it to turn the company into a closed privately owned company, which would significantly reduce the possibilities of the government as a future shareholder, to sell its stake in the company.

Under this scenario, KMG could reintroduce the right of preemption, forcing the state to sell the shares it would obtain through the conversion of the bonds to the Kazakh group first. Which would lower the risk of another investor taking over the refinery.

But a different course of action would make just as much sense: KMG could do everything to remain a majority shareholder in "Rompetrol", even if it were to convert its bonds into shares. If KazMunayGaz were to buy back part of the bonds, this would be the worst alternative for the Romanian state. The law is unclear on this point: it is not clearly explained whether the state would be required to go along, for instance, with KMG buying back half of the bonds in autumn and converting the rest into stock.

• What the Romanian state wants

The Romanian government is looking to get back the 570 million Euros it is owed by the company, in order to balance its 2010 budget.

But the government does not have the right to decide on whether it would like to be compensated with cash or with stock in the company.

Under these circumstances, the Romanian state could force a takeover of the majority shareholder of the company, precisely to force the Kazakh group to buy back its bonds.

The state could become a majority shareholder in the refinery, either with the help of the exchange rate at which the conversion of the bonds of the refinery into stock would take place, or by acquiring a small stake in the company, that would then ensure its majority in the company.

At the current capitalization of almost EUR 380 million, the state could acquire a 3% stake in RRC for roughly 11 million Euros.

If the state succeeded in gaining control of the refinery, then regardless of whether it got delisted, it could decide to reprivatize the company, thus making its stake in the company more attractive to the Kazakhs.

Getting less than half the initially invested amount for in exchange for your stake in a strategic business while at the same losing control of it, would be quit a problem for any investor. This could lead to a quite dramatic reversal in the fight to recover the company"s outstanding debt to the public budget after seven years.

What do you think about Dinu Patriciu paying one third of the amount he received for his stake in "Rompetrol" to acquire the majority interest in the company again?