The Rompetrol deal, with a twist

The Romanian government will sell 26.69% of the shares it owns in Rompetrol Rafinare for 200 million dollars to The Rompetrol Group (TRG), controlled by KazMunayGaz (KMG). Prime Minister Victor Ponta announced yesterday: "Essentially, we are selling some of the shares of the state for 200 million dollars - meaning we would make more than if we sold those shares on the stock market - and what's more, KazMunayGaz, with the involvement of the Romanian government, will have an investment fund of one billion dollars, in the near future".

What Victor Ponta is saying is true, except... it isn't: KMG won't be bringing one billion dollars to Romania, that amount may be at most 750 million dollars, provided it obtains some foreign investments.

In fact, according to the memorandum signed in February 2013 by the OPSPI and TRG, the Kazakhs will only bring 150 million dollars into the investment fund, of which 30 million represent the stake of the Romanian state, which they will pay for.

The government will hold a 20% stake in that fund, which will finance the energy projects of KMG, if the Kazakh group will deem them opportune for the next seven years.

According to the memorandum, "the fund will attract additional investments from third parties for financing the selected projects, based on a maximum debt to equity ratio of 4:1".

In other words, the fund could raise, aside from the over 150 million dollars it will bring in, more money, through loans, as it is helped by its partnership with the Romanian government - which is a good guarantor to third parties.

Art 3.1 of the memorandum stipulates: "Any profit distribution (ed. note: by the fund) will only be made in favor of TRG until the time that TRG will have recouped 100% of its capital investment (150 million dollars)".

From that point on, the profit will be distributed proportionally, to TRG and the Romanian state. Moreover, the Romanian government will have a right to veto only projects which concern national safety, and has no decision making power if the Rompetrol Group makes bad investments. The government is forced to keep its stake of 20% in this fund for at least 5 years.

The memorandum of understanding adopts Victor Ponta's manner of speaking when detailing the deal: for 26.6959% of its shares in RRC, the Romanian government will receive 175 million dollars in cash, as well as more than 25 million dollars as a "premium", which TRG will pay to the Romanian state.

This amount of 25 million dollars represents "the premium agreed by the parties for giving TRG the absolute voting majority in RRC, which will allow it, according to the law 31/90 of companies to make any decision when it comes to RRC".

In stock market speak, this deal is called a "sale of voting rights", and therefore the 25 million dollars do not represent a "premium", but rather a "price".

Hereinafter we quote from the memorandum - art 6.4: "All the ongoing lawsuits, which are tied directly or indirectly to the litigation, should be extinguished irrevocably, without being tried on the first circuit, and immediately after the extinguishment of these lawsuits, the seizure by the Romanian Tax Administration - ANAF on the assets of RRC and the foreclosure of November 17th, 2010 would be revoked and lifted".

The money earned from the sale will be paid to the OPSPI upon completion of the deal, in one installment.

The shares of Rompetrol Rafinare Constanţa (RRC) yesterday rose 6. 89%, to 0.0481 lei/ share.

Even though the volume of information available concerning the possible sale of a block of the shares of RRC owned by the state to the Kazakhs, has increased over the last few days, as usual, the Bucharest Stock Exchange did not see fit to disseminate the information to the the public that the draft agreement was yesterday discussed by the Government.

That's alright: you'll find out from the press...

The sale of the shares owned by the government in RRC will be done through a public call for tenders. TRG will have the right of preemption in this call for tenders, sources close to the situation told us.

"The transfer of the shares to RRC will only be done after payment is made, and dropping the lawsuits and ending the seizure are needed for organizing the call for tender for the sale of the shares. The OPSPI can introduce suspensive conditions concerning the deal, to make sure that TRG honors its obligations".

Prior to starting the call for tenders, the OPSPI will have to order the appraisal of the stock. Other companies can participate in the call for tenders as well. If there is a bid greater than that TRG, the Kazakhs can match it or waive their right of preemption, our sources also say.

As for the investment fund and the benefits for the state as a shareholder of that fund, will be established and detailed upon the completion of the transaction.

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The government yesterday adopted the draft law concerning the approval of the Memorandum of Understanding concluded between the Romanian state and The Rompetrol Group (TRG) N.V., signed in Bucharest on February 15th, 2013. The memorandum regulates the general terms of a complex transaction between the Romanian stat and TRG, which has three major components:

A commitment to buy, through a competitive procedure, of a block of shares representing 26.6959% of the share capital of RRC), which is currently owned by the Ministry of the Economy through the OPSPI, at a minimum guaranteed price of 200 million dollars;

The government will maintain a stake of 18% over a period of 3 years which may not be diluted. and after the expiration of this period will have the possibility to implement a new procedure of privatization for its sale;

The creation of an investment fund for 1 billion dollars with a participation of the Romanian government in the form of a joint stock company which will invest in projects in the Romanian energy sector. According to the Memorandum, TRG (80%) and the Romanian state (20%) will set up a Fund which is intended to invest in energy projects in Romania.

In a press release, the government shows that the direct effects of this transaction will materialize in ensuring a new strategic partnership in the energy sector, ensuring the continuity of investments in Romania, as well as of new investments which will preserve and create jobs, increase collected taxes to the state budget, and allow the Romanian state to obtain future revenues as shareholders in Rompetrol and in the Investment fund, the increase of the contribution to the GDP, the increase of the value of its stakes, in RRC as well as in the Investment Fund.

According to data from the Ministry of Finance, in 2012, Rompetrol Rafinare (the operator of the refineries Petromidia Năvodari and Vega Ploieşti) has paid over 4.6 billion lei (over 1.3 billion dollars) to the state budget, an amount which places the company among the biggest taxpayers in Romania.

Currently, the operations of RRC Romania employ about 7,000 employees.

The draft law will be sent to the Parliament in order to conduct the approval procedure.

Immediately after the approval of the memorandum of understanding by the Parliament the implementation of its provisions will begin. The Romanian government will regulate the measures and the deadlines for conducting the procedures set in the memorandum.

The OPSPI will begin the procedure for the sale of a stake held in RRC, while simultaneously creating the Romanian-Kazakh investment fund, which will reach investments of approximately 1 billion dollars. TRG will fully fund the investment fund, by also providing the necessary funds for the covering the stake of the Romanian state.

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Prime Minister Victor Ponta yesterday said that the draft law concerning the sale of these shares will be sent to the Parliament: "The final decision, just like in every major privatization or in the major cases such as this one, will have to lie with the Parliament. Basically, we are selling some of the state's shares in for a price of 200 million US dollars - which is more than the price of the price per share of RRC on the stock market (....). What has interested me - I will say it directly, is dfor Romania to remain an important country for Kazakhstan, a strategic economic partner for KazMunaiGaz, for the investments to continue in the refinery of Petromidia and to continue to apply that one billion dollar fund for investments".

He has emphasized that this continuation of the investments of KazMunayGaz in Romania first of all means taxes paid to the state budget, the creation of jobs and keeping Romania as the main country for investments for a major group.