Daily analyst comments

UES will acquire the stake in Lenenergo owned by Finnish company Fortum, RBC reported quoting First Deputy FGC Chairman Alexander Chistyakov. He did not specify how many shares UES is prepared to acquire from Fortum's stake (35%). However, Russian companies are to acquire the remaining shares. As reported previously, Lenenergo is to launch placement of an additional share issue in July 2007. The flotation is to be completed by July 2008.

It's noteworthy that Fortum's four nominees were included in Lenenergo's BoD in June. They are top managers headed by the concern's President which sends a signal about the company's interest in the asset. However, it was clear that Fortum is willing to focus on electricity generation and a stake in Lenenergo is at odds with the law on separation of electricity generation and distribution businesses. However, this stake could be assigned to friendly companies or swapped for interesting generating assets. Taking into account the longstanding feud for control over Lenenergo, Fortum's stake could be interesting to many investors and may have been under discussion for some time now.

In June 2007, Fortum did not rule out a sale of up to 10% of the utility's shares, while at present the plan is to sell the entire stake. This could be in exchange for permission to maintain its stake in TGC-1 as a blocking interest, although rivals (e.g. Gazprom, NorNickel, etc.) intended to buy out the entire additional share issue. It is no mere coincidence that news about the sale of the entire stake was reported precisely on the eve of TGC-1's additional share issue slated for July.

We believe that at present, Lenenergo shares are overvalued by the market and it will be difficult for Fortum to sell the stake at the current market valuation (the company's market cap is $1.28 bln). According to our estimates, Lenenergo's fair market cap is $1.04 bln and the fair price is $1.34 per common share and $1.21 per preferred share. We assign them a Sell recommendation.