Daily analyst comments

The media reported on Friday, August 17 that Finnish utilities concern Fortum adopted a decision to divest 35.5% in Lenenergo (RTS: LSNG) to the consortium of VTB, grid fund of CES Holding and UES. In addition, Interfax reported that VTB represents CES's interests and is a technical buyer required to avoid petitioning FAS, since Fortum insisted on closing the transaction by August 22. The value of the transaction is known to be ˆ295 mln ($397 mln).

It's noteworthy that the Finnish company planned to sell its stake in Lenenergo long ago and in June, the company's president said that they considered selling the stake to municipal authorities. UES voiced interest in Lenenergo's stake at that time. As reported earlier, Fortum plans to revise its strategy and focus on gencos in other Russian regions rather than focusing on utilities assets located near the Finnish border. Fortum will therefore be vying for stakes in gencos.

The price of the transaction provides for Lenenergo's valuation at 8% below the market price as of the moment when the transaction was announced. However, the transaction was closed at a time of extreme volatility on financial markets. For this reason, the transaction itself could be a positive for investors in the distribution grid segment. The fact that Fortum is looking to close the deal as quickly as possible points to the Finnish company's aspiration to participate in the buyout of the additional share issues of gencos slated for mid-September – WGC-4, TGC-1 and TGC-8.

Fortum is the largest minority shareholder in TGC-1 and intends to maintain its stake in the company at a blocking interest. What's more, Fortum's plans in the generation segment will not likely be limited to the region of operations adjacent with Finland and will spill over to other WGCs and TGCs. The company could lay claim to TGC-2, TGC-4, WGC-4 and WGC-6.

Although overall, this transaction is a positive for the distribution grid segment (the deal assumes upbeat multiples for the segment), we reiterate our Sell recommendation on Lenenergo shares.