Germany's RWE Submits Winning Offer for Russian Genco TGK-2; IES Snaps Up TGK-6

Privatisation Progress

RWE on Friday (14 March) became the latest in a growing list of European utilities to enter the new Russian power sector, with the German utility joining forces with Russia's Syntez Group to submit the winning bid in the sale of a 33.5% state stake in TGK-2. RWE and Syntez, a Russian utilities investor, paid 9.3 billion roubles (US$392.6 million) for the 33.5% stake, while UES, the former Russian state power utility that is overseeing the comprehensive reform and privatisation of the country's power generation sector, said that RWE also committed to more than 9 billion roubles to purchase new TGK-2 shares to be issued next month. In all, RWE and Syntez will invest around 19 billion roubles to take effective control of TGK-2, which supplies power to regions north and north-west of the Russian capital of Moscow.

UES said that RWE and Syntez will pay 0.025 roubles/share for the 33.5% stake in TGK-2, with the acquisition implying a sale price of US$568 per kilowatt (kW) of capacity for TGK-2. This represents a price below TGK-2's marketing price on the Russian Trading System (RTS), which saw the firm's shares fall 7.9% on Friday to close at US$0.00105/share, as well as a discount to the price paid per kWh of capacity by the other foreign utility investors. Enel paid US$690 per kW for OGK-5, while E.ON paid US$753 per kW for OGK-4 and Fortum paid US$767/kW for TGK-10 (see "Related Articles"). TGK-2 includes power plants in six regions and has installed capacity of 2.5 gigawatts.

Following the sale of the 33.5% stake in TGK-2, the genco will issue new shares next month, and with the commitment by RWE and Syntez to buy these new shares at the same prices, the UES stake in TGK-2 will fall to 11.4%. RWE and Syntez are expected to increase their combined stake in the genco to 43% following the share issue, with the companies taking de facto control as the genco's largest shareholder. Under Russian law, they will then be required to make a buyout offer for minority shareholders, which should result in them securing a majority stake in TGK-2. RWE is the senior player in the partnership with Syntez, and the German utility said it plans to take over 51% of the shares to be acquired by Syntez, so RWE will effectively become the key shareholder in TGK-2.

Separately, UES said that it had also sold a 34.06% stake in TGK-6 to Integrated Energy Systems (IES), the investment vehicle of Russian tycoon Viktor Vekselberg. IES (also known as KES Holding) paid 11 billion roubles for the stake, together with junior partner New Russian Generation. IES, which already held 19.7% of TGK-6, paid a price of 0.025 roubles/share for TGK-6, implying a price of US$437/kW of installed generating capacity. New Russian Generation is a utilities investment fund owned by Prosperity Capital Management, which held 18.9% of TGK-6 before Friday's transaction as well. UES said it will raise an additional 14.25 billion roubles from the sale of new shares in TGK-6, which supplies heat and power to Nizhny Novgorod and regions east and south-east of Moscow. IES and New Russian Generation will become the key stakeholders in TGK-6 as UES reduces its stake to 11.1% with the sale of the state's stake in the genco.

Outlook and Implications

The sale of state stakes in TGK-2 and TGK-6 represent another step forward for UES in its increasingly desperate attempts to divest of its remaining assets before the firm is scheduled to be liquidated on 1 July. UES spin-off genco TGK-7, which serves regions around the Volga River, also announced on Friday that it has priced the secondary public offering of 12.9% of its share capital at 2.848 roubles/share, implying a value of US$456/kW of installed capacity. UES is planning to sell the state's remaining stake in TGK-7 in early May, with IES and the New Russian Generation fund expected to bid and secure control of the genco.

With strategic investors in TGK-2 and TGK-6 (and implicitly, TGK-7) now identified, only a handful of the UES spin-off gencos remain to be privatised, including wholesale power genco OGK-1 and the territorial gencos that supply regions in the Urals and Siberia, along with TGK-4. However, the clock is ticking down for UES, and the sheer volume of assets still to be sold, together with newly issued shares in the spin-off gencos to reduce the UES stake, seems to be taking a toll on investors' enthusiasm. While the lower sales prices (in terms of value per kW of installed generating capacity) in TGK-2 and TGK-6 may reflect the belief that these gencos have less "upside" potential than some of the OGKs that have been sold off, the decline in the value of recent privatisations (excluding the Fortum acquisition of TGK-10) appears to indicate a sense of "investor fatigue" in the Russian asset sell-off. With concerns about a weakening of the global economy, together with the fact that the remaining genco assets on offer are not the choicest of investment targets, UES likely will see reduced offers in the coming months as it looks to divest of its stakes in the spin-off gencos before its 1 July liquidation.

Related Articles

Russia: 14 March 2008: UES Pushes Back Sale Date for Russian Genco OGK-1

Russia: 7 March 2008: Enel Boosts Stake in Russian Genco OGK-5; E.ON Content with Majority Stake in OGK-4

Russia: 3 March 2008: UES Says Buyback Shares May Not Be Sold Before Liquidation

Russia: 3 March 2008: Regulator Allows IES to Buy Control of Russian Gencos TGK-6 and TGK-7

Russia: 29 February 2008: Finland's Fortum Pays Record Price to Buy Control of Russian Genco TGK-10

Russia: 27 February 2008: Gazprom, SUEK Agree to Terms for Coal and Power JV, Await Regulatory Approval

Russia: 19 February 2008: Rosneft Lawsuit Could Split Russia's TGK-11, Complicate Genco's Privatisation

Russia: 12 February 2008: Russian Genco TGK-7 Confirms IPO Plans; HydroOGK Makes Market Debut

Russia: 7 February 2008: Power Sector Reform in Russia—Progress Thus Far, Challenges Still Ahead

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