British oil giant BP PLC (NYSE: BP) announced this morning that it has reached a tentative agreement to sell its 50% stake in TNK-BP to Russia's state-controlled oil company Rosneft for $17.1 billion in cash and a 12.84% stake in Rosneft. That works out to about $26.8 billion, based on a total value for Rosneft of $75.5 billion, of which the government holds about 70%.
BP has agreed to use $4.8 billion of the cash to purchase an addition 5.66% stake in Rosneft from the Russian government at $8 a share. The Russian government needs to approve the deal, but if it does, here is how everything works out according to BP:
Therefore, on completion of the proposed transaction, BP would acquire a total 18.5 per cent stake in Rosneft and net $12.3 billion in cash. This would result in BP holding 19.75 per cent of Rosneft stock, when aggregated with BP's 1.25 per cent current holding in Rosneft. At this level of ownership, BP expects to be able to account for its share of Rosneft's earnings, production and reserves on an equity basis. In addition BP expects to have two seats on Rosneft's nine person main board.
BP's relationship with the Russian government began to sour in 2005 and culminated with current CEO, Bob Dudley, who was then the head of TNK-BP, forced to leave Russia in 2008 when the government refused to renew his visa.
Rosneft also has snapped up the other 50% stake in TNK-BP from Alfa Access Renova (AAR) for about an equal amount of cash.
Altogether, Rosneft will spend about $55 billion to acquire all the assets of TNK-BP and will control about 50% of the country's total crude oil production. It will displace Exxon Mobil Corp. (NYSE: XOM) as the largest oil company in the world.
BP's shares are fractionally higher in premarket trading this morning at $43.19, in a 52-week range of $36.25 to $48.34.