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Gazprom and
Hermitage CapitalShareholder Activism in Russia
INTERNATIONAL CONSULTING
Issue DefinitionEnvironment Analysis
Strategy OptionsStrategy Choice
Action Plan
Issue Definition
Issue Definition
As an Activist Shareholder, How to make an investment in Gazprom?
1
Environment Analysis
Environment Analysis
Russia posted GDP Growth of
6.4% in 1999, 10% in 2000, 5.1% in 2001, 4.7% in 2002 with Industrial sector posting high growth figures as well.
22
1. Economic Environment in Russia
Environment Analysis 3
1. Economic Environment in Russia
$1,000
$2,000
$3,000
1998 1999 2000 2001 2002
$1,834
$1,328
$1,768
$2,096
$2,379
Russia GDP per Capita US$
Source : IMF
Environment Analysis 4
1. Economic Environment in Russia
0
100
200
300
400
1998 1999 2000 2001 2002
58.93
175.26
143.29
260.05
359.07
Russian Trading System Stock Exchange Index
Source : Russian Trading System
Environment Analysis
Russia's Economy is heavily dependent on Oil and Natural Gas Industry.
5
1. Economic Environment in Russia
Environment Analysis 6
Natural Gas Price Oil Price GDP growth rate
0
1.25
2.50
3.75
5.00
1998 1999 2000 2001 2002
Russia GDP Growth Rate and Oil/Gas Price(Rub)
-5.3%
6.4%
10.0%
5.1% 4.7%
10%
5%
0%
-5%
-10%
1. Economic Environment in Russia
Environment Analysis
Russia has the World’s Largest proven Natural Gas Reserves, estimated at 1,680 trillion cubic feet (Tcf).
7
1. Economic Environment in Russia
Environment Analysis 8
2,516
911
971
1,680
RussiaIranQatarOthers(17 contries)
Top 20 contries in the world, Ranked by Gas Reserves(Tcf) Source : EIA
1. Economic Environment in Russia
Environment Analysis
2. Political Environment in Russia
9
Corporate Governance Reform
Judicial Reform
Cut out bureaucracy
Tax Reform
Environment Analysis
2. Political Environment in Russia
10
Despite of these effort, Russian Political Risk is still high
Environment Analysis 11
1.5
2.5
3.5
4.5
1998 1999 2000 2001 2002
3.53.4
3.1
3.5 3.5
4.04.1
3.94.0 4.0
2.9 2.92.8
2.7 2.7
2.4 2.4
2.1
2.3
2.7
Curruption Perceptions Index(CPI) 1998-2002
Russia India Brazil ChinaSource : Transparency International
2. Political Environment in Russia
Environment Analysis 12
20%
40%
60%
80%
100%
80%
62%
48%42%
McKeever Institute of Economic Policy Analysis
Russia Brazil China USASource : www.mkeever.com
2. Political Environment in Russia
Environment Analysis 13
External Environment
Russian economy have grew up with Reform policy of Putin administration.
Energy industry are affect with russian economy.
Despite of these effort, Russian Political and Policy Risks are still high.
Environment Analysis 14
3. Analysis of Gazprom
Gazprom is the largest gas producing company in the world.
It controls almost 60% of Russian gas reserves and produces about 90% of Russian gas.
Environment Analysis 14
3. Analysis of Gazprom
Gazprom is the largest gas producing company in the world.
It controls almost 60% of Russian gas reserves and produces about 90% of Russian gas.
The company is responsible for 8% of Russia’s GDP.
Environment Analysis 15
The Company’s ordinary shares rate grew up 10 times,
whereas the price of the American Depositary Shares(ADS) went up by 40% within the period from 1999 through 2002.
Market capitalization of Gazprom grew 2.6 times since 2000.
3. Analysis of Gazprom
Environment Analysis 16
3. Analysis of Gazprom
Russian Stock Exchange
London Stock Exchange
P/E Ratio(Internal)
P/E Ratio(External)
Market Capitalization
Mareket Capitalization/Net Assets
0 5 10 15 20 25
0.41
20.43
16.89
10.93
11.70
24.02
0.21
11.35
9.77
5.16
9.70
15.75
2001 2002Source : www.gazprom.ru/eng
Environment Analysis 17
4. Analysis of Hermitage
Hermitage Fund investment to Russian Energy Industry including Gazprom.
The Company has showed good Performance under the developing Russian Economy
Environment Analysis 18
4. Analysis of Hermitage
Hermitage Performance
Source : www.hermitagefund.com
Environment Analysis 19
4. Analysis of Hermitage
1.6%11.2%
18.2%
0.5%
49.8%
18.7%
GasOilMiscFinancialsElectric UtilitiesTelecomSector Allocation in December 2002
Environment Analysis 20
Internal Environment
Gazprom is one of the important company in Russian Economy
Also Gazprom has grown constantly, but still undervalued
Therefore, Gazprom is “value stock” to Hermitage Fund
Strategy Options
Strategy Options
Stopping Investment in Gazprom
Keeping Current Investment Strategy
Enforcing Shareholder Activism in Gazprom
21
Strategy Options 22
Stopping Investment
Investing Other Opportunity
Losing Opportunity in Gazprom
Keeping Current Investment
Strategy
Easy for Fund Management
Nationalization Risk
Enforcing Shareholder
Activism
Being Better Performance
Stakeholder’s Resistance
Strategy Choice
Strategy Choice 23
Undervalued Shares
$3
$6
$9
$12
$15
$0.05
$6.51$6.87
$7.88
$12.20$12.98
$13.68
Comparable Energy Company Valuation, Fall 2000
Exxon Mobil Chevron BP/AMOCO Shell Texaco Conoco Gazprom
Strategy Choice 24
Undervalued Shares
Gazprom’s Shares have undervalued, despite last few years Growth
Strategy Choice 24
Undervalued Shares
Gazprom’s Shares have undervalued, despite last few years Growth
CurruptionLegal
Confusion
Asset-
Stripping
Poor
DisclosureRed Tape
Strategy Choice 25
Browder’s Report
Find Only 10% asset-stripping
Improve the Management
Situation
Pressure
Government
Slow the asset-
stripping
Cause the Shares to appreciate
Shareholder Activism
Strategy Choice 26
Enforcing Shareholder Activism in Gazprom
Keeping Current Investment Strategy
Stopping Investment in Gazprom
Strategy Choice 26
Enforcing Shareholder Activism in Gazprom
Keeping Current Investment Strategy
Stopping Investment in Gazprom
Strategy Choice 27
Thinking Point
Was his fund large enough to make a difference to the government?
What about his relationship with Board of Directiors?
What about his relationship with other Shareholders?
How can give more Stability to Stakeholders?
Strategy Choice
Government
Stakeholder
Shareholder
Activism
28
Relationship Management
Strategy Choice 29
Enhancing Value Process
Shareholder Activism
Value of the Com
panyShareholder Relationship
Stakeh
older Rela
tionship
Government Relationship
Shareholder Activism + Relationship Management
Action Plan
Action Plan
1. Shareholder Relationship
30
Increasing Control Abilities in the Company through Shareholder Relationship Management
Action Plan
1. Shareholder Relationship
31
Forming the Union with other Foreign Investors
Action Plan
1. Shareholder Relationship
32
Acquiring a Voting Right in the AGM
Requiring change Auditor(11.5% Foreign Companies Share)
Making Issues through Shareholder Activities(Shareholder Meeting, Lawsuit, Appeals to Regulators)
Using PR Campaigns to Emphasize
Non-Russian CompaniesRussian CompaniesThe Russian FederationIndividual Russian Citizens
15.06%
38.37%
35.07%
11.50%
Share Capital Structure 2002
Action Plan
1. Shareholder Relationship
32
Acquiring a Voting Right in the AGM
Requiring change Auditor(11.5% Foreign Companies Share)
Making Issues through Shareholder Activities(Shareholder Meeting, Lawsuit, Appeals to Regulators)
Using PR Campaigns to Emphasize
Increasing Transparency in the GazpromNon-Russian CompaniesRussian CompaniesThe Russian FederationIndividual Russian Citizens
15.06%
38.37%
35.07%
11.50%
Share Capital Structure 2002
Action Plan
2. Government Relationship
33
“Rule of the Man, Not Rule of the Law”
Putin Administration can Heavily affect the Management of Gazprom
Russian Federation has almost 40% shares in the Gazprom
Hermitage Fund has only $650 million under Management
Action Plan
2. Government Relationship
Providing Money for Political Activities
Announcing Putin’s Economic Achievements through Media
34
Action Plan
2. Government Relationship
35
Dismantling Ring-Fence System
Increasing Company Transparency
Reform Corporate Governance
Improving Foreign Investment EnvironmentReducing Political Risks
Action Plan
2. Government Relationship
35
Dismantling Ring-Fence System
Increasing Company Transparency
Reform Corporate Governance
Improving Foreign Investment EnvironmentReducing Political Risks
Enhancing the Company Value
Action Plan
3. Stakeholder Relationship
36
Different Stakeholders often have widely varied claims.
Social Interests in Business have been raised
Sometime, There is a Conflict between Stakeholders and Shareholders
Action Plan
3. Stakeholder Relationship
37
Shareholder Activism Stakeholder Activism
Action Plan
3. Stakeholder Relationship
38
Transparency
Responsiveness Compliance
Substainable Develepment
Action Plan
3. Stakeholder Relationship
38
Transparency
Responsiveness Compliance
Substainable Develepment
Maximize the Company Value
Thank YouFor Listening
INTERNATIONAL CONSULTING