Putin, Merkel to Discuss Sale of E.ON's $4.5B Gazprom Stake

MOSCOW (Dow Jones Newswires), Nov. 24, 2010

German Chancellor Angela Merkel will discuss the possibility of E.ON Ruhrgas selling its 3.5% stake worth $4.5 billion in the Russian natural gas giant Gazprom during a meeting with her Russian counterpart Vladimir Putin on Friday, Putin's spokesman said Wednesday.

E.ON Ruhrgas, the largest foreign shareholder in state-controlled Gazprom, may sell the stake as part of a large-scale plan to sell assets worth EUR15 billion by the end of 2013 to help reduce debt, refocus its business and reinvest in new markets outside Europe.

"This topic will be among the issues to be discussed at Friday's meeting in Germany," said Dmitry Peskov, spokesman of Prime Minister Putin, who will travel to Germany Friday for a two-day working visit.

A Merkel spokesman had no direct comment on E.ON's plans for its Gazprom stake, but said "energy policy in general belongs to the format of these talks."

Both E.ON and Gazprom declined to comment, but one person in the banking industry confirmed the talks.

"This has been discussed for a while, but it's hard to tell whether it's real this time," said the person, who asked not to be named. Another person with direct knowledge of the situation said the deal is actually happening.

Earlier this month, E.ON announced a major strategy shift, deciding to turn its focus away from Europe in favor of emerging markets in Asia and South America. The company didn't say which European assets would be put on the block, but has said since last year it now considers its stake in Gazprom as non-strategic.

E.ON had amassed a 6.5% stake in Gazprom, but in 2008 it exchanged a 3% share for 25% of the Yuzhno-Russkoye gas field in Siberia, leaving the company with a 3.5% stake in Gazprom.

E.ON also cooperates with Gazprom on the Nord Stream pipeline through the Baltic Sea and the sale of natural gas to consumers in Germany. Half of the Nord Stream gas pipeline, which extends from Russia to German, has already been laid and the project is on track to begin pumping gas before the end of 2011. E.ON Ruhrgas currently holds a 15.5% stake in Nord Stream. E.ON Ruhrgas is the natural gas arm of E.ON, the world's largest private utilities group.

Besides being the biggest foreign shareholder in Gazprom, the German company is also the biggest single European importer of Russian gas. Nevertheless, E.ON faces tough negotiations with Gazprom over pricing amid a slump in European demand, and seems to have gained little from its close relationship with the Russian state giant.

E.ON workers representatives have in the past repeatedly demanded that the company's management consider selling the Gazprom stake because it doesn't offer strategic benefits.

Ruhrgas and Gazprom have had business relations dating back 40 years, despite the cold-war divide between the Western and Eastern bloc at that time. In 1970, Ruhrgas and Sojuzgazexport--a company that later became an affiliate of Gazprom--reached an agreement known as the "gas for pipes deal" under which Ruhrgas became a major importer of natural gas in return for a large delivery of gas pipelines. The partnership was expanded over the following decades and in 1998 Ruhrgas purchased its first 2.5% in Gazprom.

"We don't think this transaction reflects Gazprom's lack of fundamental attractiveness from E.ON's point of view, but rather is a result of E.ON's own priorities," said Ildar Davletshin, analyst at Renaissance Capital.

Russia's state development bank Vnesheconombank, or VEB, is the likely buyer of the stake, the Kommersant daily said earlier Wednesday. The country's finance minister Alexei Kudrin said VEB's board hasn't yet discussed such a deal.

"This still hasn't been discussed," Kudrin said, who is a member of VEB's board.

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