By Selina Williams And Natalia Drozdiak
LONDON--Russian billionaire Mikhail Fridman began building an
international energy company on Monday, closing a EUR5.1 billion
($5.7 billion) purchase of German utility RWE AG's oil-and-gas
business over British opposition that could force a sale of the
unit's U.K. assets.
The deal gives Mr. Fridman's $29 billion investment fund,
LetterOne Group, oil-and-gas fields in the U.K., Denmark, Norway,
Germany and Egypt and licenses in several other countries, a
springboard for ambitions to create a large global energy player.
LetterOne named former BP PLC Chief Executive John Browne to lead
the new business, called L1 Energy.
But the British government over the weekend threatened to force
L1 Energy to sell the U.K. assets involved in the purchase. Mr.
Fridman's group on Monday criticized that stance, saying U.K.
Energy Secretary Ed Davey's opposition to the sale of the U.K.
assets was "not rational."
LetterOne said it reserved the right to take legal action and
seek compensation if the government followed through on its threat
to block the sale of 13 North Sea gas field stakes to Mr.
Fridman.
The U.K. government said it is concerned that U.S. or European
Union sanctions against Russia over the conflict in Ukraine could
be extended to Mr. Fridman, who maintains business and government
relationships in Moscow. Mr. Fridman and other Russians involved
with LetterOne aren't currently targets of sanctions.
Asked for comment, the U.K. government reiterated its statements
from the weekend.
The confrontation between Luxembourg-based LetterOne and the
U.K. government comes as tensions increase over the conflict in
Ukraine, a transit route for Russian gas to European markets, and
concerns about Russian ownership of energy assets in the region.
Last week, Russia's stated-controlled OAO Rosneft threatened to
halt gas deliveries to Ukraine if it failed to make a prepayment
for new shipments.
Mr. Davey told LetterOne and RWE over the weekend that if the
sale proceeded, he "would be minded to require" the companies to
sell the assets to a third party. The fields make up between 3% and
5% of the U.K.'s gas production.
RWE and LetterOne's agreement already requires that the U.K.
assets to be held separately and that the German utility to buy
back its those fields if sanctions were imposed on Mr. Fridman, his
partners or the fund within a year. Mr. Davey said that didn't
alleviate his concerns.
The British North Sea natural-gas fields form about 20% of the
value of the transaction for RWE's oil-and-gas business, Dea, which
produces about 100,000 barrels of oil equivalent a day. So even if
the U.K. government succeeded in blocking the British part, Mr.
Fridman's group would still have acquired considerable assets.
The deal marks Mr. Fridman's return to the energy industry two
years after he sold his stake in TNK-BP to Rosneft, a sale that
provided the seed money for Monday's purchase. Mr. Fridman, 50
years old, rose from a window-washing business to become one of
Russia's richest men. Alfa Group, which he set up with billionaire
German Khan, has interests spanning banking, retail and water
utilities. Alfa Group collected $13.9 billion from the 2013 sale of
TNK-BP to Rosneft.
It also makes Mr. Fridman and Lord Browne business partners
again, a decade after their sometimes-fractious relationship over
Mr. Fridman's purchase of the main asset in Sidanko, a Russian oil
company that BP owned a stake in. Later they were partners in
TNK-BP.
Both men said they had put their differences aside. "The one
thing about being adversaries is you learn more about them than you
do when you're business friends," Lord Browne said in an interview.
"When we got it all together TNK-BP was a fantastic activity."
L1 Energy, which would be capitalized with $10 billion plus
debt, will focus on acquiring assets alongside the ones it already
owns in addition to buying into exploration opportunities and
development projects or even companies, Lord Browne said.
"This is not an investment activity. This is building a company
for the future," Lord Browne said.
Mr. Fridman and Lord Browne face uncertain odds in their fight
with the U.K. government, legal experts said.
Ross Denton, a London-based partner at law firm Baker McKenzie
LLP, said that LetterOne could face an uphill battle in a court
proving that Mr. Davey's decision was unreasonable based on the
information currently available. Claiming damages could also entail
a high burden of proof on LetterOne to show that Mr. Davey was
maliciously trying to hurt them.
However, the fact that the deal has received approvals in the
other countries relevant to the transaction and the U.K. is the
only one that declined to provide the approval could work against
the U.K., Mr. Denton added.
An RWE spokeswoman said the company doesn't plan to take part in
any legal action with LetterOne. The sale was crucial for RWE,
which is trying to reduce its EUR31 billion in debt. RWE said the
deal is now worth slightly more than the parties agreed on in
January because of fluctuations in exchange rates. RWE in January
had agreed to sell Dea for EUR5 billion.
Write to Selina Williams at selina.williams@wsj.com and Natalia
Drozdiak at natalia.drozdiak@wsj.com
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