* Saipem market value hit by profit warnings, graft probe
* New Eni management set to revive sale plans
* High Saipem debt levels may slow sale
* Saipem break up could avoid need for new equity
By Stephen Jewkes, Pamela Barbaglia and Sophie Sassard
MILAN/LONDON, July 25 The new management of
Italy's Eni plans to press on with the sale of a
controlling stake in oil services subsidiary Saipem so
it can focus on the more lucrative business of finding oil and
gas, sources said.
Former ENI CEO Paolo Scaroni had inked in plans to dispose
of Saipem but they were put on hold when Italian Prime Minister
Matteo Renzi drafted in new management to run the
state-controlled oil giant.
Saipem became a liability for Eni last year when half its
market value was wiped out by two profit warnings and a damaging
investigation into alleged corruption in Algeria, which also
With oil and gas production compromised by conflict in Libya
and unrest in Nigeria, along with project delays in Kashagan and
Angola, Eni also needs to sell assets to fund increasingly
costly upstream investments and maintain its dividend.
"Eni's new management is indeed ready to resume the sale of
Saipem, though it first needs to cut its debt either via asset
disposals or raising equity," a source close to the matter said.
Eni has a 43 percent stake in Saipem and fully consolidates
it on its balance sheet, including 5.5 billion euros of debt.
But it keeps it at arm's length and has no day-to-day influence
over management because Saipem also works on some contracts
awarded by Eni.
Claudio Descalzi, who took over the top spot at Eni in May,
has yet to pronounce on plans for Saipem but is expected to flag
his intentions at a strategy meeting next Thursday.
Descalzi was head of exploration and production (E&P) at Eni
under Scaroni and nurtured in-house engineering skills that
would go some way to make up for the loss of similar expertise
if Saipem is sold off.
Saipem supplies engineering services, project management and
construction services to oil and gas companies for both onshore
and offshore projects and carries out drilling worldwide.
"Saipem has been under strategic review for a long while and
Eni's new management is willing to go ahead," a second source
familiar with the matter said.
"Options under review include a break-up of Saipem's
distribution, production and transformation operations," the
source said, adding that decisions about this might be taken in
the second half of the year.
Eni declined to comment.
In May, Descalzi announced a new structure at Eni to help
focus minds on growing the more lucrative exploration and
production business, while turning round or downsizing other
less profitable businesses such as refining.
In a recent report, HSBC said a sale of Saipem was likely
but it might not be in the short term because of low valuations
after last year's profit warnings and high debt levels.
"Saipem has historically benefitted from debt guarantees
from Eni. We believe Saipem would need to be refinanced if it
were to be floated as a stand-alone entity," HSBC said.
Saipem, whose debt-to-equity ratio stands at a hefty 60
percent or so, borrows through Eni, whose A rating is higher
than Italy's. But people close to the matter said Eni was taking
steps to get Saipem on an independent footing.
A banker who works on funding with Saipem told Reuters that
Eni was already calling on lenders to negotiate debt guarantees
directly with Saipem.
"They're slowly weaning Saipem off Eni's milk," he said.
A breakup of Saipem would allow the firm to cut its debt
pile without tapping the market for new equity, which some
bankers say would have to be in the order of 2 billion euros to
make the company appetising.
"Previously there was discussion about selling the onshore
drilling business which could be worth around 1 billion euros
and could find buyers because it's a steady cash generator," a
banker who had been privy to Scaroni's plans said.
He said another option the former CEO had been toying with
was the issuance of a convertible bond by Saipem.
Saipem's onshore and offshore drilling business accounts for
some 15 percent of the company's revenues which in 2013 stood at
about 12 billion euros.
The company is feeling the pinch from lower investment by
oil majors. This is making life harder for equipment and service
Reports earlier this year said Norway's Seadrill
was interested in buying Saipem's offshore drilling business
while Subsea 7 was interested in a stake in Saipem.
(Editing by David Clarke)