EOS Russia board statement and recommendation on the future of the Company
The Board of Directors recommends that the meeting resolves that the Company continues its operations with the intention of returning the invested capital to its shareholders in an orderly fashion when successful realisations are achieved. The continuation of the Company has the advantage of making it possible to execute a managed process to maximise the returns to our shareholders while the alternative, the appointment of external liquidators, has the disadvantage of instituting an irreversible process of realisation of the Company's portfolio with unpredictable consequences.
Upside valuation potential from the company’s continuation
The Board of Directors and Management are best positioned to achieve the significant potential upside in the Company's key shareholdings, now concentrated in Russian electricity distribution companies (MRSKs). This valuation upside potential stems mainly from the Russian government’s declared intention to privatize the MRSKs. The Board of Directors believes that the expected privatization of the MRSKs is likely to create a unique divestment opportunity at higher price levels. The current average valuation of EOS Russia's relevant holdings is around 0.44x EV/RAB ratio (Enterprise Value to Regulated Asset Base Value). This compares with an estimated average valuation of their emerging market peers at approximately 1.7x EV/RAB (valuation date 12 February 2013), implying significant potential upside. Since the RAB system for MRSKs was re-launched from 1 January 2013, more than 86 per cent of the sub branches of EOS Russia's five largest holdings are now functioning under the RAB system. Along with anticipated cost savings by companies operating under the new tariff regime, these developments create good grounds to expect an upward rerating of MRSK share prices which would be in the interests of EOS Russia's shareholders.
In accordance with our strategy, EOS Russia will be aiming to sell its core MRSK stakes directly to strategic investors in connection with the Russian Government's privatization plan for the sector. This process involves the retention of stakes which are large enough to be of interest to strategic investors and involves a relatively elaborate network of relationships in the sector, including already established cooperation with other substantial MRSK shareholders.
Potential loss of value and other risks resulting from liquidation
In the case of external liquidation, these potential gains would not be realised. By removing the current Board and Management, the external liquidation option would effectively preclude the advantages that the current sizeable stakes offer while introducing the disadvantage of the necessity to sell large holdings in illiquid securities in a short period of time, thereby depressing the achievable prices. An announcement of the appointment of external liquidators would probably result in a sharp and immediate decline in the quoted share prices of our holdings and push the realised prices down compared with the current market prices. In addition, the liquidation route would create significant uncertainties related to the day-to-day operations of the Company as well as to its investment attractiveness, divestment expertise in the Russian illiquid markets and share listing. The timing of actual realisations in an external liquidation process conducted under such conditions would be unpredictable.
Stockholm March 2013
EnergyO Solutions Russia AB (publ)
Board of Directors
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EOS Russia is an investment company headquartered in Stockholm. The overall objective of the company is to offer attractive returns via investments in the Russian electricity industry. EOS Russia's shares have been listed on First North, a marketplace operated by the Stockholm Stock Exchange, since 25 June 2007. Remium Nordic AB is the Certified Adviser.