Breaking Up Eni Is Hard to Do

eni_dog.gifYesterday I saw this note on FT Lex which essentially argued for the Italian energy company Eni to be split up into two separate companies in order to maximize value.  Today they are running another piece about the activist investor group Knight Vinke, who are eager to see the same thing happen – they even cite the energy security issue as one reason for Eni to be broken in half.  In the past, the lurching energy dinosaurs of Europe have fought off any attempts at unbundling from the European Commission by pointing to the conveniently threatening spectre of Gazprom, arguing that they’ve got to stay big in order to negotiate with such a monster.  The rub is that a split Eni would likely grow two-fold, so that’s not a concern.  The elephant in the room we aren’t talking about, of course, is how Eni could keep its special relationship with the Kremlin if this happens.  As it turns out, Eni and Gazprom have gotten so deep into bed that acting rationally might not always be the easiest course.

Here goes today’s FT Energy Source blog on the breaking up of Eni:

The energy security argument is an interesting one.  As Knight Vinke’sstatement acknowledges, the structure it now finds so cumbersome cameabout largely to create a national champion big enough to deal with thelikes of Gazprom. And the two have certainly worked togetherextensively, collaborating on a Libyan venture, and with Eni agreeing to work on Russia’s proposed South Stream gas pipeline, and buying – and then selling back – a stake in Gazprom Neft.Knight Vinke argues that Eni’s utility business on its own would beless exposed to commodities price risk, and therefore more able to takeon debt.  The question is, how would that affect its relationship withGazprom?

Here is where we point out the obvious – that Eni became the very firstforeign company to actually own assets from the disputed and arguablyillegal auctions.  Their participation and ownership helped tolegitimize the proceedings, and in some senses, legitimize the jailingof Mikhail Khodorkovsky.  At the time, all executives pretended asthough they were genuinely interesting in keeping the stake inGazpromNeft, and that they had not been pressured to buy it just forshow.  That performance, it seems, is now over.

On June 19th, Robert Amsterdam signed a letter of warning to the shareholders of Eni regardingthese affairs in Russia, which was published in the global edition ofthe Financial Times.  In summary, if the accusations of the Russianstate are proven by a court, then a conviction of Khodorkovsky on thesecharges would mean that the Russian state can then seize any and allassets belonging to Eni as part of this same alleged crime:  “Since the Procuracy’sassertion is that Messrs Khodorkovsky and Lebedev embezzled all of theoil in conjunction with the original acquisition at the wellhead fromthe production subsidiaries, then all of the Yukos oil sales andsubsequent transactions and revenues generated are the proceeds of thecrime and are subject to recapture. The Procuracy can easily argue thatthere was a “substantial connection” between the Yukos assets and theembezzlement and money laundering as charged.