Russia's OAO Gazprom on Thursday clinched a long-delayed deal that will give German utility giant E.ON AG a stake in one of the world's largest natural-gas fields in exchange for Gazprom shares currently valued at about $5.3 billion.
The deal represents a setback for Gazprom, which has touted a strategy of swapping stakes in its highly sought-after Russian reserves for overseas assets -- part of a drive to transform itself into a global player to rival energy heavyweights such as Exxon Mobil Corp.
The E.ON deal shows how little progress Gazprom has made with that strategy. The company had hoped that E.ON, one of Europe's largest power and gas utilities, would trade some of its European assets for a share in one of Gazprom's fields in Russia. But after four years of talks, the gas giant had to settle for some of its own stock controlled by E.ON.
Under the deal, which was signed with German Chancellor Angela Merkel and Russian President Dmitry Medvedev looking on, E.ON acquired 25% minus one share in the Yuzhno Russkoye field. In exchange, when the deal closes in the second half of next year, Gazprom will get 2.93% of its own stock held by E.ON. The German utility will retain a 3.5% stake in Gazprom.
E.ON had expected to swap stakes in its Hungarian gas trading-and-storage business and a Hungarian power utility for the right to participate in Yuzhno Russkoye. That plan dovetailed with Gazprom's aspiration to expand beyond Russia's borders and into the lucrative European gas-distribution business. But negotiations dragged amid disagreements over valuations. Gazprom said soaring oil prices increased the value of the Russian field and demanded more from E.ON in return.
Subsequent talks about E.ON assets in other European countries, including the U.K., also foundered. The deal was complicated by the war between Russia and Georgia this summer, which fueled hostility in Europe toward Russian companies, especially state-run ones like Gazprom. Wulf Bernotat, E.ON's chief executive officer, said in an interview last month that Gazprom's drive to secure European assets "probably has not been made easier" by the post-Georgia fallout.
A person close to Gazprom said the company decided the assets E.ON was offering were "inadequate" and that the deal was a "good opportunity to buy back Gazprom stock" when its share price is depressed.
Gazprom CEO Alexei Miller in June predicted his company would be the world's largest within seven to 10 years, with a capitalization of $1 trillion. Gazprom's market value has since halved amid turmoil on Russian equity markets to $182 billion.
An E.ON spokesman said the Gazprom stake sale "simplified" negotiations because its value could easily be derived from the company's stock market capitalization. He said the deal was an important "political symbol" of corporate Europe's continued commitment to Russia.
Yuzhno Russkoye, with reserves of 600 billion cubic meters, will supply Western Europe through a pipeline that will run from Russia and under the Baltic Sea.
E.ON describes itself as Gazprom's biggest customer, and has been importing gas from Gazprom since 1973. Last year, it paid more than 4 billion euros, or about $5.5 billion, to buy a majority stake in a large Russian electricity generator.