This is a very interesting emerging-market valuation and investment decision case. It is more complicated than our previous cases. The following are some of the points to work on for the case.

1.  What factors are responsible for the huge price difference between the domestically traded shares in Russia and the ADS shares in New York? List and explain how each such factor may have been responsible.

2. Can you construct an arbitrage strategy buying the Russian shares and selling short the ADS shares to take advantage of the spread? What factors make such a trade hard to do? Any risks in doing such a strategy?

3. Taking into consideration the environement in which Gazprom operates, do Gazprom's financial statements  reflect the financial condition of the company? How do the barter transactions reflect the accounting of Gazprom? How should you make adjustements to Gazprom's Income Statement and Cash Flow so that they can be reestated for the cash that actually is collected by the company?

4. Besides barter transactions, the Russian government holds 40% of Gazprom's shares. From the government's perspective, it wants Gazprom to first guarantee employment so that social unrest can be avoided, and secondly provide free loans to the government through running a large accounts payable for the government. These objectives of the government as a controlling shareholder are contradictory to the interests of other shareholders. How does this affect valuation of the firm for a foreign investor? Can you design structural arrangements to mitigate this conflict, assuming you are a consultant to James Bolden? Given the environment for Gazprom, is it possible for Gazprom to actually have any free cashflow?

5. What would be a fair valuation of Gazprom shares from an American investor's perspective? What would be a fair valuation from a Russian investor's perspective? Determine a cost of capital from each investor's perspective and apply DCF to value the firm.

6. For valuing Gazprom, besides cashflow, you can use dividends, book value of equity, accounting revenue per share, and Barrels of Oil Equivalent (BOE, you can view this as "barter revenue") as the basis to come up with a valuation range. That is, once you get these base numbers for valuation on a per-share basis, you apply what is a "reasonable" multiple to the base numbers in order to come up with a valuation range. You may use the multiples for comparable firms as the basis to determine what is a reasonable multiple, or use what you think should be a reasonable multiple. For Gazprom, which valuation yardstick(s) do you think are more appropriate? Price/earnings, price/cashflow, price/book, price/accounting revenue, or price/BOE ratio? Why?

7. Is Gazprom an attractive investment for Mobaco? What form should the investment be, an 8% interest bond or such a bond with a conversion option? If a bond with a conversion option, what should be the right conversion ratio? What are the risks of an investment in Gazprom?