City investors demand $20bn cut in Rosneft's flotation value

OIL_If the Russian oil company pumps less crude and has smaller assets than its rival, Lukoil, why should it be worth more?

Russian oil giant Rosneft, whose partial float in London next month will be one of the world's largest, must slash its valuation by over $20bn (£11bn), investors have warned.

The four banks leading the float - Morgan Stanley, JP Morgan, ABN Amro and Dresdner Kleinwort Wasserstein - have met 100 asset management companies to gauge interest.

Most have been left deeply unimpressed with the presentations. They rejected the target valuation of between $80bn and $90bn and said Rosneft was not worth more than rival Lukoil, which is valued at $58bn. Lukoil pumps more oil and has larger proven reserves than Rosneft.

Some investors asked how much money the state-owned company would set aside for litigation. Rosneft faces lawsuits from shareholders in Yukos, the rival Russian oil company forced by the Kremlin to sell its main asset to Rosneft for a knockdown price in 2004. One of the brokers meeting potential investors was unable to answer questions about possible litigation.

F&C, which met the company's brokers last week, said it would continue to boycott the float because of corporate governance concerns. Karina Litvack, the head of corporate governance, said: "We are still trying to get our head around the company's exposure to litigation risk and country risk."

Rosneft's advisers are understood to have already privately conceded that they will have to make a slight cut in the target valuation range because of the recent stock market slump, though not as much as $20bn.

The four banks will hold a conference call with Rosneft management and Russian government officials today to warn them of investors' belligerent mood.

Other investors, including Bill Browder, the chief executive of Hermitage Capital, a Russia specialist, criticised the methodology used to give Rosneft such a high valuation, based on future growth prospects stretching to 2010 and beyond.

Mattias Westman, the chief executive of Prosperity Capital, which has $2.3bn of investments in Russia, said: "In Russia, predictions beyond three years become uncertain. Valuations should be based on a predictable time frame."

Nerea Heras-Mendaza from Axa Investment Managers complained that it was "quite difficult to find independent research" on Rosneft. A syndicate of 27 banks loaned Rosneft $3.3bn to buy the Yukos subsidiary, and will be repaid from the float's proceeds. The lower the valuation, the more of itself Rosneft will have to sell to raise the target $10bn.

On 26 June, Rosneft will publish the price range of its shares, which are due to be listed in Moscow and London on 14 July.