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. Last Updated: 07/27/2016

Two Banks Plan Merger After a 'Rigged' Sale

Avtobank-NIKoil and Ural-Siberian Bank announced Friday that they will merge in a year to create one of the country's largest banks, following a sell-off of a UralSib stake that analysts are flatly calling rigged.

NIKoil Financial Corp., the parent company of Avtobank-NIKoil, is conducting a due diligence study of Ufa-based UralSib, and UralSib will return in kind by January, the two banks said Friday.

NIKoil president Nikolai Tsvetkov told reporters that the combined bank would have 500 offices across the country, a figure close to that of Rosbank-OVK -- a bank formed in July when Rosbank's owner, Interros, bought Pervoye OVK bank for $200 million.

The planned merger could create "the second-biggest branch network in Russia," after Sberbank, said Andrew Keeley, banking analyst at Renaissance Capital. But like other analysts, he qualified his comments: "It's still a long way off. Seems premature to be talking about it now."

"The question is, who is going to manage the [combined] bank?" said Richard Hainsworth, head of banking rating agency RusRating and a banking analyst at Renaissance. "They should have made it a little bit clearer. Everything they now say has to be questioned."

What Hainsworth was referring to was a confirmation Friday from the two banks that a NIKoil affiliate won a 14 percent stake in UralSib from the Bashkir government on Wednesday. Earlier, NIKoil had publicly denied it planned to bid.

Under the terms of the sell-off, everyone who bid got shares based on the money they offered. NIKoil and two other bidders paid 1.25 billion rubles ($42 million) for a 15 percent stake, said Radik Saborov, head of sales at the Bashkir Property Ministry. This is equal to the starting price of 10.4 kopeks per share, he said.

The actual value of the shares is closer to $55 million to $58 million, according to Renaissance Capital.

"This auction was quite closed. It was covered only by the local press, they did not do any road shows. From the start, it was clear this would be a special deal [for NIKoil]," said a senior analyst at a major investment bank who asked not to be identified.

A NIKoil spokesman acknowledged that NIKoil had previously denied any interest in bidding but said that was before it had made up its mind about participating. Before reaching the decision, "we had no obligation before anyone" to announce it, he said.

Some sort of a deal had long been expected. Last week, Vedomosti reported that NIKoil had bought a controlling stake in UralSib -- an outcome that UralSib president Azam Kurmanayev staunchly denied Friday. He refused to reveal his stake in the bank, which though publicly traded has a small free-float.

"While [a lack of honesty] may be manageable in many areas of business ... in banking it is unacceptable," Hainsworth wrote in a research note. "No matter how profitable this latest deal was for UralSib and NIKoil, they have traded short-term gains for reputation."

Asked about the business logic behind the purchase and the possible merger, observers tended to highlight the benefits for NIKoil, not UralSib. "When one doesn't see clear economic benefits, something else is going on," Hainsworth said by telephone. He did not elaborate.

But other analysts suggested that the deal might be less of a business decision than the product of a behind-the-scenes struggle before Bashkortostan's presidential election on Dec. 7. Last Monday, the republic's elections committee barred Sergei Veremeyenko from challenging incumbent President Murtaz Rakhimov. Veremeyenko, a co-owner of Kremlin-connected Mezhprombank and a senior official in the pro-Kremlin United Russia party, has appealed to the Central Elections Commission, which was expected to rule in his favor Monday.

"People are quite scared in the run-up to the presidential election," the senior analyst said. "They would like to have some support on the federal level." NIKoil is connected to oil giant LUKoil, which has strong links with the federal government.