BP Takes Stake in Rosneft Despite Threat From Legal Challenge

BP has taken a $1bn stake in oil company, Rosneft, but the Russian group's $10.4bn (£5.65bn) international share offering remains under threat from a legal challenge due to be heard in the the high court in London on Monday.

State-controlled Rosneft yesterday set the price for the initial public offering, under which it is offering shares to strategic allies such as BP as well as international investors and the Russian retail market, at $7.55. At the offer price the company is valued at almost $80bn.

The company said the price set would make the IPO the world's fifth largest and make Rosneft Russia's second biggest company by market capitalisation. Three strategic investors, including BP, are each buying more than 5% of the shares on offer. BP has bought 10% and China's CNPC has bought $500m worth of shares, according to market sources, with Malaysia's Petronas said to have bought a similar amount.

The price is towards the top end of the indicated range of between $5.85 and $7.85. Some analysts argue that by bringing in non-Russian oil groups such as BP, Russia's president, Vladimir Putin, who will host this weekend's meeting of the G8, is seeking to head off concerns the Kremlin is tightening its grip on energy assets. Others suggested the strategic investors could be looking for closer links with the Kremlin because of its growing influence in the energy sector. Following the IPO the Russian government will be the beneficial owner of just under 85% of Rosneft stock.

The shares initially rose 5% in grey market trading yesterday, but later slipped back to stand just ahead of the offer price.

Rosneft's securities will be listed in Russia and the UK, with trading expected to start in London on Wednesday, following admission by the the UK's Financial Services Authority, the company said yesterday. The bulk of the proceeds from the offer, which was 1.5 times oversubscribed, will be used to repay a $7.5bn loan that Rosneft took out to buy a 10.74% stake in Russian energy group, Gazprom.

However, the IPO is facing a challenge from another Russian company, Yukos, which claims its most important subsidiary, Yugansk, was seized and sold by state auction to pay $33bn in back taxes. Yukos has consistently argued that the move was part of a Kremlin campaign directed at its politically ambitious founder, Mikhail Khodorkovsky, who was jailed for tax evasion and theft.

Yukos is now seeking a judicial review of the decision by the FSA and the London Stock Exchange, arguing that the way in which Rosneft acquired Yugansk meant the FSA and the LSE should not have given permission for the offer to go ahead.

Yesterday, Mr Justice Charles said he would decide on Monday morning whether there was time to hear the substantive judicial review before dealings in Rosneft shares begin on Wednesday or whether proceedings would have to be confined to an application for an interim injunction.

Clare Montgomery QC, for Yukos, said the case involved a challenge to listing and prospectus decisions made by the FSA and to the LSE's decision to allow trading in Rosneft securities. There were issues over the applicability of statutes designed to combat financial crime and money laundering.

A Yukos spokeswoman said the company looked forward to presenting its case. "We also are greatly appreciative of the emphasis the court has put on the need for sufficient time for a full and fair hearing."

A Rosneft source said: "The company is confident that the court will support the decisions by the FSA and the LSE."

The FSA said yesterday that it had approved the prospectus submitted by Rosneft and that the company could now submit a formal application to list. "The FSA is aware that Yukos has lodged an application for leave to apply for judicial review of FSA decisions in this case. Decisions will remain in place unless and until they are affected by a determination by the court."

Two Russian exchanges said the UK legal battle would not delay Rosneft's debut at home. "We are working to Russian law, not British law," said a spokeswoman for RTS, while the second exchange, Micex, said dealings would start next week.

Rosneft said strategic investors had constituted 21% of the demand for shares, international investors from Europe, the US and Asia 36%, Russian investors 39% with Russian retail investors accounting for 4%.

Asked if BP was concerned about the Yukos legal challenge to the flotation a spokeswoman said the investment had been made on "strategic and commercial" grounds. BP was "satisfied" with its allotment.