National Oil Company Petrom – the privatization approach

5 September 2003 (Invest Romania)

According to the Romanian Government, a strategic investor, Petrom’s employees and the European Bank of Reconstruction and Development shall act as key players within the privatization process of the National Oil Company Petrom.

The Ordinance No. 55 and the Decision No. 924 have been issued in 26th of August by the Government in order to adjust the privatization legal framework so as to facilitate the project’s implementation. Although with a two months delay, the State Office for Privatization in Industry launched on the same date of August 26th the Petrom Privatization Announcement.

Briefly, the Announcement provides that the privatisation method shall combine the sale of shares through negotiation based on preliminary and non-binding bids with a share capital increase.

Thus, the privatisation of Petrom shall consist of offering a 51 % shareholding in Petrom to strategic investors (the Strategic Transaction) to be implemented as follows: (i) the sale of 12,580,689,954 existing shares by the Romanian State, representing 33.34% of the existing share capital and (ii) the simultaneous share capital increase under a full subscription and payment of newly issued shares to allow the strategic investor to hold 51 % of the share capital of the Company upon such increase.

Strategic investors are defined as Romanian or foreign entities with experience in operating oil and gas companies and with proven financial and managerial resources, as well as the technical capabilities needed to ensure the future development and viability of Petrom. Companies seeking to pre-qualify for the bidding stage must provide documentary evidence of (i) annual revenues from oil and gas operations in excess of US$ 1,000 million for the last three years and (ii) technical and managerial experience of a minimum of three years in the oil and gas field, appropriate to the size and profile of the Strategic Transaction.

Candidates that seek to pre-qualify for the bidding stage as a consortium (not to exceed four members) must provide documentary evidence referring to (i) combined annual revenues in excess of US$1,300 million for the last three years, with a majority from oil and gas operations and (ii) technical and managerial experience of a minimum of three years in the oil and gas field appropriate to the size and profile of the Strategic Transaction (i.e. for at least one member of the consortium).

In line with the development of the Strategic Transaction, a stock of up to 5.0% of the share capital of Petrom could be allotted to the European Bank for Reconstruction and Development (EBRD) in a debt for equity swap based on a pre-privatisation loan extended last year. The employees of Petrom have been also granted with an option to acquire under the privatization process a stock of up to 2.0% of the share capital of Petrom, provided that at a later stage where the State decides to decrease its shareholding in the said company, the employees shall be entitled to increase their share stock up to 8% of the entire share capital of Petrom.

As the Ministry of Economy and Commerce expressly retained the right to amend anytime during the privatization process the terms and conditions of the Announcement, the adjustments are supposed to come. Most probably, future amendments shall refer just to the bidding prequalification criteria, process time schedule and miscellaneous, as far as the privatization method has been approved through enactments having the force of law. Any amendment to the privatization method shall trigger changes in the applicable laws.

However, neither the Ordinance No. 55, nor the Decision No. 924 clarifies all matters related to the proposed share capital increases and the share assignments to be concluded with the employees. Although the applicable regulations seek for, the Announcement does not expressly provide that all share capital increases are to be made in cash, fully subscribed and paid up at the subscription date. Furthermore, no information is released in connection to premiums attached to newly issued shares. As Petrom is listed on the Bucharest Stock Exchange, to consider a premium for the assignment of new shares under the capital increase process is mandatory, save for specific rules to come.

One would expect specific provisions to guide the negotiation of terms and conditions for the proposed debt for equity swap to be entered by and between Petrom and EBRD. Lacking such guidelines, the share price under the debt equity swap arrangement may lead to consistent debates, involving all the players in the privatization process. Also, much is still to be done in relation to Petrom’s employees. They have been granted with an option to purchase shares that might be called first for a price at least equal with the one paid by the strategic investor, but the State Office for Privatization in Industry is to issue norms in this matter.

The deadline for submitting the letters of intention is September 19, 2003, while the pre-qualified investors will be announced by September 30. The public institution involved plans to complete the privatization procedures by March 2004.


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