By John Helmer, Moscow
Oleg Deripaska’s electricity company, Eurosibenergo, is facing the loss of between 7% and 33% of its potential value in the Hong Kong market, as the banks running the attempt at a listing on the Hong Kong Stock Exchange can find few sharebuyers who value the company above the range of $4 billion to $5.6 billion. The banks are Bank of China International, Russia’s state-controlled VTB, and Deutsche Bank.
Over recent months, as the plan to list Eurosibenergo has stimulated publicity, Deripaska insisted that the company should float with a market capitalization of $8 billion . At the start of this month, this was reduced to $6 billion . Now Eurosibenergo’s executives and advisors have been meeting with the Hong Kong institutions for several days before the new $4 billion number emerged from their talks.
If Eurosibenergo must be floated to cover $1.4 billion in debts the utility acknowledges, then Deripaska is facing a haircut of 50% since the intention to float the company before year’s end was confirmed. If that happens, and Eurosibenergo is valued at no more than $4 billion, Deripaska will either have to sell more shares — 35% of the company’s capital, instead of the planned 25%. Or else he will have to disappoint his creditors.
The potential for failure is also likely to test Deripaska’s relationship with Prime Minister Vladimir Putin and Deputy Prime Minister Igor Sechin. A year ago, they came to the rescue of the struggling attempt to list Rusal on the Hong Kong Stock Exchange by agreeing to “anchor” a 10% share sale with state bank money.
Rob Edwards, Renaissance capital’s metals analyst, reveals in a report on Rusal, issued Monday, that since then the buyers of Rusal shares are “almost exclusively hedge funds” wagering on the movement of the aluminium metal price on the London Metals Exchange (LME). According to Edwards, the hedge funds “bought the IPO in the belief that the aluminium price would continue to rally into 1Q10 and consequently that RUSAL would be a leveraged trade on that rally, rapidly revaluing its equity relative to enterprise value.” He omitted to report that the hedge fund bets can also combine going long (upward trajectory) on the metal, and going short (downward trajectory) on Rusal.
This time round for Eurosibenergo, a lifebuoy is more urgently needed than an anchor.
Meanwhile, in Tokyo the controlling shareholder could find only Bloomberg ready to print the claim that EuroSibEnergo can raise $1.5 billion in the proposed new IPO. “The sale will take place in December, Deripaska told reporters in Tokyo yesterday. EuroSibEnergo plans to sell a 25 percent stake by year-end, a person familiar with the matter said…”
In Moscow, the investment bankers and share brokers are more negative. Alfa Bank power analyst Alexander Kornilov reported to clients today that Eurosibenergo may be worth no more than $3.7 billion. At that level in the Hong Kong marketplace, Deripaska could raise only $925 million – half a billion less than his company owes.
“Based on the current valuation,” Kornilov writes, “the listed parts of the company are worth $3.7bn, according to our estimates. However, this valuation excludes the company’s stakes in Volgaenergo, Irkutsk Networking Company, and Marem + Supply Company, as well as its engineering assets. At first glance, if the placement takes place at these levels, it will be NEUTRAL for Irkutskenergo’s and Krasnoyarskaya GES’s minorities, as the appraisal valuation is only 13.5% above the current market price at the high end of the range and 18.9% lower at the bottom end.”
But Kornilov is the first among the Moscow investment houses to warn that the reason for the heavy discounting that is going on for Eurosibenergo’s enterprise value and share price is its dependence on Rusal as the principal buyer of electricity. “We note,” according to the Alfa Bank report, “that there is a high risk of transfer pricing, which is still practiced at Irkutskenergo and Krasnoyarskaya GES, whose largest shareholder is RusAl. This factor should be taken into account, as it would result in a discount to RusHydro’s valuation (the company’s largest hydro competitor). In any event, we do not rule out a speculative spike in Irkutskenergo’s and Krasnoyarsk GES’s share prices in the short term.”
In the Edwards report for Renaissance Capital, the cheap electricity Eurosibenerego is providing Rusal can be expected to go on for ever and ever – and may even become cheaper in price in future. Edwards tries political forecasting to support this: “RUSAL enjoys material support from the Russian state in various forms, including state-subsidised transport and electricity tariffs and tax breaks. We see little reason for the government to withdraw support for RUSAL and endanger the company’s economic welfare.”
“Russian electricity tariffs have two components: a regulated and a market component. The regulated portion is established by the government, and is due to increase 7.6% in 2010. The market component, in the case of RUSAL, is set by the smelter. For BrAZ, IrkAZ and KrAZ, the market component is based on long-term contracts signed by the RUSAL board of directors. In the case of BrAZ and IrkAZ, the contracts will extend for nine years until 2018; in the case of KrAZ, the contract will run for 11 years until 2020.”
“The tariffs do not include the cost of transmission, which is calculated yearly and indexed to inflation. RUSAL’s other Siberian smelters do not have contracts linked to the LME price of aluminium, but similarly low energy costs due to regional oversupply. Such is the sensitivity of RUSAL’s power contracts with its main suppliers that in 1H10, it recorded a gain in the value of its derivatives related to power contracts of $569mn. We believe that electricity tariffs in east Siberia could fall due to excess supply.”
For the moment, the Hong Kong Stock Exchange records show no stock ticker has been assigned yet to Eurosibenergo. That is the official signal that the exchange’s Listing Committee has formally approved the share sale and the prospectus which goes with it. No prospectus has been published yet.