MOSCOW The billionaires who own half of Russian oil firm TNK-BP TNBP.MM plan to make a cash offer for BP's (BP.L) 50 percent stake, raising the prospect of a bid contest with state-backed Rosneft (ROSN.MM) that would start at around $20 billion.
Such an auction would pit the four Soviet-born tycoons, who amassed their assets in the chaotic 1990s, against Rosneft's chief executive Igor Sechin, a confidant of President Vladimir Putin who wants to build his company into a national champion.
A source close to the AAR consortium, which groups Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik, said it would make a binding offer by mid-October.
"We will pay cash, but have not yet determined the price," the source said on Wednesday.
AAR had previously said it was willing to pay $10 billion for half of BP's stake in Russia's third-largest oil company.
But BP, which put its entire TNK holding up for sale in June after a collapse in shareholder relations, was not interested in that offer, industry sources said.
AAR then expanded the scope of its bid after Rosneft said it also wanted to buy BP's stake, for cash and stock.
Analysts put a fair value on the stake of $25 billion, so BP stands to make a handsome return on its original investment of $7 billion in 2003, as it faces multi-billion-dollar damages arising from the Gulf of Mexico disaster in 2010.
"Anything that leads to the end of a fight (between TNK's shareholders) with an impossible solution is positive," Riccardo Orcel, deputy chief executive of VTB Group (VTBR.MM), a Russian state bank close to Rosneft, told the Reuters Russia Investment Summit on Wednesday.
"TNK-BP is a phenomenal company - it has probably been the best ever investment that BP has made."
SHOW ME THE MONEY
Under a shareholder agreement, AAR has exclusive rights to make an offer by a mid-October deadline that falls 90 days after BP put the stake up for sale. Other suitors may then seek to strike a deal, creating the prospect of a bidding contest.
AAR would "likely" fund the deal by borrowing through TNK-BP and tapping other funding, the source said. How much the AAR shareholders themselves might invest is unclear. The consortium will start talks with banks this week.
Bankers have told Reuters that it would be possible for AAR to finance a significant portion of any purchase by leveraging up TNK-BP, which has paid out $19 billion in dividends since BP came into the venture in 2003.
TNK-BP posted a record $14.6 billion in earnings before interest, taxation, depreciation and amortization (EBITDA) last year. At year-end it had a low debt to equity ratio of 26 percent.
With net debt of around $3 billion now and EBITDA estimated at $13 billion, "there is huge capacity for additional debt", the AAR source said.
BP expects to receive bids from both AAR and Rosneft and will consider them on their merits. "We will evaluate, negotiate and make a decision," a spokesman said.
Bankers and analysts say that BP is likely to prefer Rosneft as a buyer and would seek to use good relations with the Kremlin to gain new opportunities for oil and gas exploration in Russia.
BP has, however, lost the Arctic offshore territory that it had hoped to explore with Rosneft in a joint venture deal which was killed off by a challenge from its TNK partners.
Rosneft subsequently turned to ExxonMobil (XOM.N) for an Arctic deal, with the U.S. firm's chief executive Rex Tillerson now a regular visitor to Russia.
Under a sale of its TNK stake to Rosneft, BP would plough back part of the proceeds into Rosneft stock, a source familiar with its thinking said, but would not embark immediately on any joint exploration operations with the Kremlin-backed company.
Meanwhile the 12 international banks that have already started financing talks with Rosneft are unlikely at the same time to talk about financing for AAR's full bid, banking sources in London said.
But bankers said the final outcome could be for Rosneft to eventually take complete control of TNK-BP, creating a global major pumping nearly 4 million barrels per day of oil.
BP could be joined as a minority shareholder in the merged group by a Chinese buyer, fulfilling government plans to sell down the state's 75.1 percent stake in Rosneft, the bankers said.
(Additional reporting by Isabel Witt in London; Editing by Louise Heavens and Greg Mahlich)
(email@example.com; +7 495 775 1242)