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German VNG may be Gazprom’s first EU takeover

An eastern German gas distributor beset by struggles among its shareholders may be the first chance for Russian gas giant Gazprom to take a majority stake in a western European company.

Gazprom, which already holds some 5% of VNG, is shaping up as the preferred main shareholder for VNG Verbundnetz Gas as the gas company’s founders try to foil northern German utility EWE’s plan to take full control. Gazprom has aimed for years to buy companies in countries, such as Germany or Britain. But all its attempts -- it had hinted at a possible takeover of British utility Centrica and wanted to swap gas for E.ON units in Germany -- have been derailed.

Companies want to keep control of the lucrative business of selling gas, while governments are wary of foreign control of energy assets as they are vital to the country’s economy. With VNG, founded in the former communist East Germany, things might turn out differently. The company has a more amicable relationship with Gazprom than do others. “We as eastern Europeans have never had a problem with the Russians,” said Andreas Reinhardt, managing director of the VUB association of 12 eastern German municipalities, which holds around 26% of VNG. “VNG does not feel dependent on Gazprom but connected to the company.” A person close to Gazprom said that the company would consider buying VNG if the opportunity arose.

The person declined to be identified as Gazprom’s strategy is confidential. Meanwhile Reinhardt declined to comment on possible further plans of Gazprom and VNG, a company which could be worth around €3 billion if valued in line with other recent deals in the sector. Italian oil and energy giant Eni in late May bought Belgian gas distributor Distrigas for 9 times earnings before interest, depreciation and amortization (EBITDA) in the most recent sale of a gas grid in Europe. VNG generated 2007 EBITDA of €337.5 million on sales of 4.2 billion. “The company is a jewel,” said a Frankfurt-based investment banker who declined to be identified.


MUTUAL ESTEEM

Gazprom has gone out of its way to show how fond it is of VNG. CEO Alexei Miller and Deputy CEO Alexander Medvedev came to Leipzig, where VNG is based, for ceremonies marking the 35th anniversary of Russian gas deliveries. “We will play an active role in making the future European gas market work,” Miller said, declining to be more specific. VNG Chief Klaus-Ewald Holst flattered Gazprom by saying: “Our relationship is far more than just about supplies.” EWE CEO Werner Brinker did not attend the ceremony as relations with VNG deteriorate. VUB sued one of its own members, the municipal utilities of the city of Jena, for agreeing to sell its stake to EWE. The suit comes after EWE Chief Brinker was not re-elected as chairman of VNG’s supervisory board -- despite EWE being the largest shareholder -- and VNG Chief Holst left EWE’s management board, citing “conflicts about strategic questions”.

EWE owns around 48% of VNG. Other shareholders are BASF’s oil and gas unit Wintershall with around 16% and Gaz de France with about 5%. Both companies are potential competitors of Gazprom if EWE were ever to sell its stake in VNG. EWE’s Brinker maintained in a Reuters interview, that he was still seeking to buy Jena’s 1% VNG stake. But EWE might decide to divest its stake finally. A source close to the management of the company said that EWE is aware it would not be able to manage a company controlled by two warring factions. Gazprom so far has only minority stakes in western European companies and made few actual acquisitions on the continent. Most of its shareholdings are companies that are joint ventures set up to sell Gazprom’s gas on wholesale markets. But winning access to customers would give Gazprom, which supplies a quarter of the EU’s annual gas needs, profits otherwise left to wholesalers and retailers.

As part of that strategy, Gazprom raised its stake in German gas distributor Wingas to just under 50%. It plans to build a power plant with E.ON in Germany and to build the South Stream pipeline together with Italy’s Eni to deliver Russian gas to southern Europe. While Gazprom may have little difficulty convincing VNG of closer ties, it may have more work to do to sway the German government. Berlin is working on legislation that would let it block the acquisition of strategic assets. (Reuters)