RWE (RWE; AG), Germany’s second largest power utility, disclosed on Sunday that it would sell its producing and exploratory oil and gas subsidiary, called RWE Dea, to London based L1 Energy Fund. L1 energy, which is controlled by two Russian oligarchs, is paying about US$7 billion (Euros 5.1 billion) for the deal. “This agreement is a major milestone in delivering our announced strategic realignment of the group, ” said RWE Chief Executive Peter Terium.
The L1 winning bid was higher than those of two other competing bids. One rival offer came from Wintershall AG, a subsidiary of the German chemical conglomerate BASF, who are currently and the biggest domestic German oil and gas producer. The third offer came from a grouping of U.S. private-equity firms led by Kohlberg Kravis Roberts (KKR).RWE has been strategically trying to cut their US$30 billion level of debt now, for over a year, through assets sales.
The deep European recession, which Germany did not escape entirely and, as well, at the margin a significant impact from the entry of renewables into the marketplace had hurt its traditional business model.
RWE is based in Essen, North Rhine-Westphalia. Through its various subsidiaries, the energy company supplies electricity and gas to more than 20 million electricity customers and 10 million gas customers, principally in Europe.
In case you were wondering, too, RWE stands for: “Rheinisch-Westfälisches Elektrizitätswerk AG” which was its official name until it was shortened to simply RWE a few years ago.
RWE Dea is a small producing oil company subsidiary of RWE, which is based in Hamburg. RWE says the new ownership group now plans to make the German unit “the principal conduit of the group’s investments in the oil and gas industry.”
Again just in case you are keenly interested in corporate etymology, “Dea” stands for: Deutsche Erdöl-Aktiengesellschaft. Finally, Erdöl means simply “petroleum, ” so now all is clear (Aktiengesellschaft, or its abbreviation AG, just means joint stock company).
The L1 Energy Fund got the money to do this new deal with RWE from a huge earlier asset sale in Russia, just last year. In March 2013 The TNK-BP oil producing joint venture was sold to Russian state owned oil company Rosneft for US$55 billion. The Russian Alfa Group, which represents some of that country’s richest businessmen, received US$14 billion in cash for its 25% stake in the joint venture.
Two of the partners in the Alfa Group, Mikhail Fridman and German Khan (a third is Alexei Kuzmichev who runs the Alfa Bank) moved quickly to set up an investment company afterwards called LetterOne (L1), in London and Luxembourg, to invest their share in the proceeds.
LetterOne then established a new energy fund, called L1 Energy Fund, with a stated goal of investing around US$10 billion of their own equity into new oil and gas production and exploration deals over the next three to five years, with total investments planned of US$20 billion.
The new fund was born with impeccable top level advisors. These include former BP CEO Lord Browne and the former head of Schlumberger Andrew Gould. LetterOne itself, which will include both the partners’ telecoms and energy investments, is being managed by Jonathan Muir who is a former CFO of TNK-BP itself.
Now with the deal just announced with RWE, LetterOneare starting to put their money back to work in their original industry, in a major way.
Mikhail Fridman himself is currently worth over US$17 billion, according to Forbes Billionaires list and German Kahn is not far behind, with “only” US$11 billion. Two other participants in the TNK-BP sale, Len Blavatnik and Viktor Vekselberg have so far moved less quickly to reinvest their own shares of the proceeds back into the industry.
The announcement of this RWE deal continues Fridman’s and Khan’s efforts to diversify the Alfa Group outside of Russia. Political confrontation in the Ukraine, however, could now lead to possible looming EU and US financial sanctions in response
As these would also be targeted personally at Russian oligarchs and their cash, this could have perhaps provided an incentive for them to establish some facts on the ground preemptively, in something of a hurry therefore.
Even so L1 Energy is an exceptionally interesting vehicle; if it gets results and helps develop the industry it will deserve to be judged solely on its merits, in the long run.
About Mikhail Fridman
Mikhail Fridman, who today is 50, was born in the Ukraine. He graduated as an engineer from Moscow’s Institute of Steel and Alloys in 1986. He then started his career in trading and financial services before founding the Alfa Group Consortium in 1989. Fridman sits today as the Chairman of the Supervisory Board of the Alfa Group, now one of Russia’s largest privately owned investment groups.
Fridman has been a Russian representative on the International Advisory Board of the Council of Foreign Relations since 2005. Since 2005 he has also been a member of the Public Chamber of Russia.
As an active supporter of Jewish causes both in Russia and Europe, in 1996 he was one of the founders of the Russian Jewish Congress (RJC), and today sits on its governing board. He has made large contributions as well to the European Jewish Fund, a non-profit organization aimed at developing European Jewry and promoting tolerance and reconciliation on the continent.
Fridman is a member of numerous public representative bodies, including the Board of Directors of the Russian Union of Industrialists and Entrepreneurs and the National Council on Corporate Governance.
About German Khan
German Khan, who is 52, was also born in the Ukraine, in Kiev, and he first met Fridman when they studied together to be engineers at the Moscow Institute of Steel and Alloys, graduating in 1986. To help finance their studies, the duo made some money trading in theatre tickets.
After graduating Fridman and Khan went into business, in partnership with another fellow student, Alexei Kuzmichov together establishing the Alpha Group Consortium in 1989.
The company prospered in post Communist Russia, diversifying into banking, retailing, and telecommunications as well as the oil and gas company that they formed in eventual partnership with British Petroleum
When the Alfa Group first took over oil company TNK, Khan ran the operation. When it became a joint venture with BP he remained as its Executive Director.
Khan is married with five children and today lives in the outskirts of Moscow. He enjoys hunting and has a large collection of sporting guns and rifles.
Also like Fridman, Khan has been an active supporter of Jewish causes, including making large contributions to the work of the European Jewish Fund. He is also a leading member of the Russian Jewish Congress.