EOS Russia´s investment case and new synthetic buyback program
- Result of a review of EOS Russia’s investment case by the company’s Board of Directors
- New synthetic buyback program to a maximum of 29.9 per cent of all outstanding shares in the company to start on 27 February 2013
- The annual general meeting will be held on 10 April 2013 at the conference centre 7A, Strandvägen 7A at 11.00 a.m. CET.
EOS Russia’s portfolio is now very heavily concentrated in Russian electricity distribution companies, MRSKs, with the aim of benefiting from the on-going launch of the RAB regulation system and, above all, from the expected privatizations of MRSKs.
The bulk of EOS Russia’s investment in the electricity distribution sector is divided between four different MRSKs (MRSK Volga, MRSK Center-Volga, MRSK North-West and MRSK Urals), in which it now holds 6.3-16.4 per cent stakes. EOS Russia believes that there will be opportunities to form larger divestment alliances with other market players. In the case of several MRSKs, the combined shareholding of participants in such alliances may be a blocking stake (more than 25 per cent of the voting shares).
EOS Russia has divested several 1-2 per cent stakes in TGKs and other Russian electricity companies over the past 1-3 years. Some of these sales were priced at a premium of 20-35 per cent relative to market share prices on the day of the transactions, some of which were carried out with the help of similar divestment alliances.
The privatization of the MRSKs is likely to create a unique divestment opportunity. This expectation is based on the experience of electricity distribution privatizations in other emerging market countries, the mass privatization of Russian generation companies (OGK/TGK) in 2007-08 and the already visible indications of interest in the MRSKs from potential strategic investors. EOS Russia therefore believes that MRSK privatizations are likely to attract significant strategic interest, both foreign and Russian.
The current average valuation of those EOS Russia holdings that already have all their distribution assets under the RAB is 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 around 1.7x EV/RAB ratio (valuation date: 12 February 2013), implying significant potential upside.
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 already functioning under the RAB system. It is expected that the remaining non-RAB assets will join the RAB, in some cases during the current year.
The RAB system implies significant earnings growth. For instance, guidance published by MRSK Center-Volga implies an increase in net profit from US$63 million in 2012 to US$222 million in 2016 (source: MRSK Center-Volga presentation as of December 2012, currency translation to USD at USD/RUB 30.15).
On top of the predicted earnings growth, the RAB system includes a cost-cutting formula that allows the companies to retain the higher net income resulting from cost cuts exceeding the expected level during the 5-year regulatory period. Experience from other countries indicates that this may allow an efficient owner to multiply the target returns set by the regulator. This is also the reason why distribution companies tend to trade significantly above 1x EV/RAB around the world.
It is also worth noting in this context that in November 2012, Prime Minister Dmitry Medvedev signed a government resolution on the dividend policy of state-owned enterprises mandating, as a norm, dividend payouts of 25 per cent of net income.
While EOS Russia expects that most acquirers of privatized majority stakes in MRSKs would make offers to buy out minority shareholders, especially if the buyer is a foreign company, it also believes that there may be several situations when it will make sense to strike separate divestment deals with the strategic buyers.
Russian government officials have stated publicly that 1-2 pilot MRSK privatization projects are planned to be started this year. Based on experience from completed privatizations in other emerging markets and from the privatization of Russian generation companies in 2007-08, it is reasonable to expect that such pilot projects will be followed by further privatizations.
The period since 2011 has seen significant progress in the implementation of the RAB system in Russia and preparing the ground for the privatization of the MRSKs. EOS Russia has contributed to this process and will continue this work also going forward.
The intention of EOS Russia is to return the generated divestment proceeds to its shareholders via share buybacks and/or other mechanisms after the divestments have taken place.
Synthetic share buyback
The Board noted that in the event of the above-mentioned potential for advantageous divestments of EOS Russia’s holdings in various MRSKs being realized, the proceeds would create a favourable foundation for completing the synthetic buyback of the company’s own shares.
The cancellation of 13,454,658 shares repurchased under the first synthetic buyback program has been completed. The new number of outstanding shares in EOS Russia AB is 43,218,519. As a result, EOS Russia holds no own shares and currently has no swap positions (synthetic positions) relating to shares in EOS Russia.
The Board of Directors has resolved to utilize the synthetic buyback authorization given by the extraordinary general meeting on 6 February 2013, starting on 27 February 2013. For this purpose, a swap agreement has been entered into with SEB AB. The initial period in which buybacks of the company’s own shares may take place will end on 22 March 2013 in order to enable redemption of such synthetic repurchased shares at the annual general meeting.
Information regarding purchases during the previous trading day will be communicated at 8:45 CET Monday-Friday, on EOS Russia’s web site and through subscription to EOS Russia’s NAV-information (please visit http://www.eos-russia.com/display?id=79 to subscribe).
Stockholm, 26 February 2013
EnergyO Solutions Russia AB (publ)
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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.