Repost from the WSJ: Yukos Still Expects Merger With Sibneft, Despite Delays
May 14, 1998
By MATTHEW BRZEZINSKI
Staff Reporter of THE WALL STREET JOURNAL
MOSCOW -- A union between two Russian oil giants that would create one of the world's largest private oil companies has been postponed, fueling speculation that the announced merger of AO Yukos and AO Sibneft might never happen.
The two firms were to have united by July 1 to form AO Yuksi, an oil holding company with audited reserves larger than both Exxon Corp. and Royal Dutch/Shell Group. But this week, Yuksi executives conceded that the merger deadline has been pushed back until the end of the year.
"There are many problems" in the merger talks, Yukos Chief Executive and acting Yuksi President Mikhail Khodorkovsky told reporters, declining to discuss specific hurdles. Mr. Khodorkovsky, however, strongly rejected rumors that negotiations between his firm and Sibneft had reached an impasse over the share split in the new company. "We will resolve our differences," he said.
When the merger was announced in January, Yukos proposed to take a 60% stake in the new company, leaving the remaining shares to Sibneft, which is controlled by billionaire financier Boris Berezovsky. But plunging oil and equity markets are said to have since soured the original equation as officials renegotiate the split. Yukos, saddled with $1.2 billion in debt, according to 1998 financial statements, is particularly vulnerable to market swings, analysts say. Stephen O'Sullivan, an oil-industry expert at United Financial Group in Moscow, says a sign of the growing rift is that as many as 150 Sibneft executives have left Yuksi headquarters in recent weeks. Yuksi representatives say this is a routine personnel rotation.
It also remains unclear how the disruption in the merger talks will affect Elf Aquitaine SA of France, which has agreed to buy 5% of Yuksi for $528 million, once the merger has been formalized.
The troubled merger process comes amid recent concern over the financial health of Yukos, which, like most Russian oil majors, has been hit hard by the fall in world oil prices this year. Last month, Yukos technically defaulted on a $500 million loan arranged by Goldman, Sachs & Co. after failing to meet export targets against which the loan is secured. Western bankers say the situation has since been addressed.
Yuksi is no stranger to controversy. Both Sibneft and Yukos have been fending off allegations of impropriety broached by minority shareholders such as U.S. financier Kenneth Dart. He has filed several complaints with the Russian Securities and Exchange Commission alleging that the companies strip the assets of subsidiaries by buying the output of their units at knockdown prices and reselling it through the parent at world-market levels. Mr. Khodorkovsky called the charges "unconstructive."
Yukos shareholders also have been worrying about the whereabouts of the shares of subsidiary Eastern Oil Co. Yukos borrowed $800 million late last year to buy 54% of the Siberian oil producer at a privatization auction. But while Yukos's Jan. 1, 1998, balance sheet lists the money borrowed to acquire Eastern as debt, it doesn't include any Eastern Oil shares as assets. A Yuksi spokeswoman says a 19% stake in Eastern is included in the most up-to-date Yukos financial statement, which isn't yet available to the public. A further 35% of Eastern shares will, in the near future, be "purchased" by Yukos, the spokeswoman said. The seller and price weren't disclosed.
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