Yukos merger suspended

Russian oil firm Sibneft suspended an $11 billion takeover by rival Yukos yesterday and a source familiar with the move said the company was looking for a way out of the deal.

Sibneft's statement came without warning or explanation five weeks after the arrest of Yukos's founding shareholder Mikhail Khodorkovsky - Russia's richest man and architect of the merger deal - and just over a week ahead of countrywide parliamentary elections.

"The completion of a merger between Yukos and Sibneft is suspended due to a mutual agreement reached between the core shareholders of both companies," Sibneft said in a statement.

Yukos's new Chief Executive Simon Kukes said he was surprised by the announcement and that Yukos would make its own statement later yesterday. But some hours later company spokesman Alexander Shadrin said there would be no further comments.

The source said shareholders in Sibneft, including billionaire Roman Abramovich, who owns London's Chelsea soccer club, had lost faith in the merger after imprisonment forced Mr Khodorkovsky to resign as CEO.

"I think there are problems in managing the company. Yukos lives without its founder. The merged company could be very unstable," said the source on condition of anonymity.

Mr Khodorkovsky, whose political ambitions may have put him on a collision course with the Kremlin, is in jail awaiting trial on tax evasion and fraud charges. Pro-Kremlin forces are ahead of opposition parties in the pre-election polls.

Sibneft's announcement came shortly after the start of a joint shareholders' meeting to elect new board members. It stunned financial markets in Moscow and abroad, and sent Yukos and Sibneft shares tumbling.

Sibneft appeared also to have been alarmed by the relentless pressure on Yukos by prosecutors, who searched its offices and seized documents earlier in the week.

Some analysts said they believed the Kremlin had never felt comfortable about a deal that would create a corporate giant in control of one third of Russia's oil output.

But they said it would prove very difficult for Sibneft to extricate itself from the merger without a mutual agreement.

Either party would have to pay a penalty fee of $1 billion to get out of the deal. Sibneft gave no further official explanation for the suspension of the buyout, in which a 92 per cent stake in Sibneft has already passed to Yukos's main shareholders in exchange for 26 per cent of Yukos shares, plus $3 billion in cash.

The pair aborted an attempt to merge operations in 1998. "I don't see how you get from Yukos having 92 per cent of Sibneft shares on its balance sheet to the deal unravelling," said Matthew Thomas, an oil analyst at Alfa-Bank in London.

Yukos shares fell 7.5 per cent but pared losses to close down 5.33 per cent at $11.35. Sibneft shares fell 11 per cent in early trading by recovered to end 3.7 per cent lower at $2.35.

Some stockbrokers said they suspected Mr Abramovich wanted to renegotiate better terms for the merger or pull out altogether and seek a Western buyer instead.