The federal government has handed it a bill for $3.4-billion (U.S.) in unpaid taxes and says it must pay by Wednesday or its assets will be seized. It is also in default on more than $1-billion in loans to other creditors, who could push the company into bankruptcy. Best of all, its chief executive officer sits in a jail cell, and is on trial for a laundry list of crimes against the state. And what does Merrill Lynch call this train wreck of a company? A buy. A high-risk one, but a buy nevertheless.
Russia's Yukos Corp. has to be one of the most bizarre business stories of the past several years, if not the decade. One of the world's largest producers of crude oil, with an output just slightly greater than Libya, the company is largely the creation of Mikhail Khodorkovsky, one of a new generation of Russian billionaire entrepeneurs that built their business empires from the wreckage of the former Soviet economy. Now, Mr. Khodorkovsky is in prison and on trial — a victim, some say, of Russian president Vladimir Putin's ruthless attempts to rub out one of his fiercest critics.
Just last year, Yukos was poised to become an even larger force in the global energy market, with the $35-billion takeover of its main competitor, Sibneft. Then the government suddenly froze the company's bank accounts and charged two senior executives — Khodorkovsky and his right-hand man, Platon Lebedev — with fraud and tax evasion. Russian authorities said the company had evaded more than $7-billion in taxes, and ordered it to repay that sum in two instalments. The first payment of $3.4-billion or so is due this Wednesday.
Since Yukos has no control over its bank accounts, however, the company says there is no way for it to sell assets or find other ways of meeting the government's request, and has said it may have to file for bankruptcy. Some critics have speculated that this is exactly what the Russian president wants, despite the fact that Mr. Putin specifically said last month it is "not in the interests of the state for Yukos to go bankrupt." This is undoubtedly true; many observers have noted that the failure of one of the country's largest corporations under government pressure wouldn't exactly enhance Russia's reputation in the international community.
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So why does Merrill Lynch seem to think Yukos is a buy, despite all the turmoil and the prospect of imminent bankruptcy? In effect, the brokerage firm's analyst, Anatoli Kaminov, believes that Mr. Putin does not want to bankrupt the company, despite all the pressure his government has put Yukos under. According to Merrill, what Mr. Putin wants is to neutralize Mr. Khodorkovsky and the other controlling shareholders of Yukos, who exercise their control through a voting group known as Menatep. Provided that can be accomplished without resorting to bankruptcy, Merrill says the stock is significantly undervalued.
Shares of Yukos, which are traded in the United States as ADRs (American Depositary Receipts) have fallen by more than 60 per cent over the past eight months to a recent low of $27.75, from a peak of more than $75 in October. According to Merrill, the shares are worth as much as $36 each based on a number of different scenarios for dealing with the Russian government. "We believe that Yukos is not at risk as a going concern," the firm's report says, "even if the company is put under temporary administration."
Merrill says that is Mr. Putin wants to neutralize Mr. Khodorkovsky and his senior executives, there are several ways he could accomplish that goal. The former Yukos CEO and the Menatep group could be found guilty of tax evasion and fraud, and the government could seize their stake in the company; the company could be forced to issue new shares, diluting the Menatep stake (and possibly giving the government a "golden share" or special control stake); and the company could pledge the Menatep shares as collateral for the tax debt, which would effectively give the government control over the company.
In each of these cases, Merrill says the company could emerge relatively unscathed and profitable, with cash flows that justify a $36 share price. Although they may not have a "buy" rating on the stock, other brokerage firms also see a light at the end of the tunnel for Yukos, if not for Mr. Khodorkovsky and his associates. Morgan Stanley analyst Craig Kennedy says there is a chance that instead of pushing the company into bankruptcy, the government will instead accept its controlling stake in Sibneft as payment for the tax debt. If that were to happen, the Morgan analyst says Yukos would still be worth investing in because of its size and profitability.
This rosy view of Yukos's fate is hardly unanimous. Several brokerage firms, including Renaissance Capital, say the chances that the company will be forced into bankruptcy are above 50 per cent and rising with each passing day, particularly with announcements such as the one that came out on Monday — in which lender Societe Generale said Yukos was in default of a $1-billion loan agreement. But Merrill and others believe that the risk is worth taking . Whether they are right or not is something only Mr. Putin can say.
Read a related editorial from Wednesday's edition of the Globe and Mail here.