CORPORATE FINANCING NEWS | MERGERS & ACQUISITIONS
Mergers and acquisitions involving Russian companies, including Morgan Stanley’s planned sale of its global oil-trading unit to Rosneft, are threatened by Western sanctions on Moscow over the Ukraine crisis. The ongoing crisis is likely to have a negative impact on global M&A activity, according to lawyers and analysts.
M&A deals involving Russian companies accounted for 17.2% of global M&A by value last year, according to Mergermarket. In order for the Morgan Stanley deal to go forward, the Committee on Foreign Investment in the United States must grant it clearance. Although the CFIUS rarely blocks inbound investment, this deal runs a risk of being delayed, or even blocked, says Reuben Miller, editor-at-large at Policy and Regulatory Report, part of Mergermarket. An approval would run contrary to the Obama administration’s ongoing attempt to discipline Russia over its annexation of Ukraine’s Crimea region.
Rosneft is 70% owned by the Russian government, and the deal—announced on December 20, 2013—would give the company more than 100 traders and shipping schedulers in London, New York and Singapore, as well as more than $1 billion worth of oil, and Morgan Stanley’s 49% stake in Heidmar, a Connecticut-based tanker company. British oil major BP also owns 19.8% of Rosneft, following an asset swap last year.
“Beyond the acute concern that a CFIUS review brings, the likelihood that sanctions may be expanded must be considered, especially if Russia does not respond to US demands or moves to control territory beyond Crimea,” Miller says.
The Russian M&A market is particularly important for Canadian companies, which received 47% of Russian outbound M&A in 2013, according to Troy Ungerman, Toronto-based partner at Norton Rose Fulbright. “In the short term, the threat of economic sanctions may deter deals,” he says. “Any sanction is likely to have an impact on M&A prospects.”
Many businesses in Russia are owned by the state or by Russian oligarchs. Therefore, sanctions could stand in the way of many deals. “In the long term, the greater impacts will be as a result of a loss of investor confidence in the stability of Russian assets,” Ungerman says. “This will slow the purchase of Russian companies by foreign buyers and make it more difficult for Russian companies to acquire the foreign capital necessary for their own purchases.”
Russia already suffers high rates of capital flight, and this economic instability may also accelerate attempts by Russian companies and individuals to purchase foreign assets, which are now perceived as comparatively safer, Ungerman says.
GERMAN DEAL PLANNED
Debt-burdened German utility RWE reached a preliminary agreement in March to sell its oil and gas subsidiary DEA to L1 Energy, the investment vehicle of Russian billionaire Mikhail Fridman, for $7.1 billion including debt. DEA has oil and gas assets in the UK, Germany and the North Sea. RWE recently reported a loss of $3.8 billion for 2013, its first full-year loss since 1949.
Regulators in several countries would have to approve the DEA deal, which was speeded up because of concerns about sanctions. Germany’s Economy minister, Sigmar Gabriel, says the deal was based on company decisions
and was “essentially unproblematic.” However, several senior German political leaders have questioned the decision, saying it could increase Germany’s dependence on Russian energy.
Meanwhile, France’s Total is planning to partner with Lukoil on its shale-oil projects in Russia’s massive Bazhenov formation in western Siberia. The two companies have been in talks since before Russia’s annexation of Crimea.
ExxonMobil of the US, in a joint venture with Rosneft, plans a $500 billion exploration of the Bazhenov, and other, formations, as well as a $15 billion liquefied natural gas terminal in Russia’s Far East. Rosneft says the project remains on track despite the sanctions. ExxonMobil CEO Rex Tillerson recently said the events in Ukraine would have no expected impact on the US oil company’s partnerships with Rosneft. As part of another deal last year to create an Arctic research center for oil and gas, ExxonMobil gave Rosneft an option to acquire a 25% stake in Alaska’s Point Thomson natural gas field.
On March 21, president Barack Obama issued his third executive order in two weeks, authorizing the US to target anyone operating in “sectors of the Russian Federation economy.” The sectors include financial services, energy, metals and mining, engineering and defense. “These sanctions would not only have a significant impact on the Russian economy but could also be disruptive to the global economy,” Obama said.
Economic, structural and legal limitations of the European Union make it unlikely that the EU will match US sanctions that directly target the Russian economy, according to a client publication by Shearman & Sterling. Russia does 14 times more business with the EU than it does with the US, the law firm says. In addition, the EU’s Iranian sanctions have been successfully challenged in the judicial systems of EU member states.
The EU sanctions primarily consist of asset freezes and travel bans of individuals deemed to have taken actions that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine. However, the EU could take a look at issuing broader sanctions if Russia were to move further into eastern Ukraine.
Britain is trying to ensure that EU sanctions do not infringe on the City of London’s role as a financial center. Several Russian initial public offerings in London have already been shelved, but conditions could return to normal relatively quickly if tensions ease, bankers say.
Russia has imposed sanctions against several advisers to president Obama and several members of Congress, including speaker of the House John Boehner and Senate majority leader Harry Reid. Although president Vladimir Putin recently announced that he would refrain from imposing further sanctions on the US or the EU, there is no guarantee that Russia will not retaliate economically in the future if additional sanctions are implemented against Russia, Shearman & Sterling says.
While the fate of Morgan Stanley’s deal hangs in the balance, J.P. Morgan has announced plans to sell its commodities trading business to a Switzerland-based energy trading company, Mercuria Energy Group, for $3.5 billion. Privately held Mercuria was started in 2004 by two former Goldman Sachs traders, Marco Dunand and Daniel Jaeggi, and has grown rapidly to become one of the world’s largest independent commodity traders.
The Federal Reserve said last year that it might force insured lenders to get out of the commodities-trading business. The comment period ended March 15 for public input on whether the Fed should put restrictions on banks’ trading and warehousing of physical commodities. Several lawmakers have raised concerns about potential conflicts of interest and market manipulation if banks own, transport and trade commodities.