On August 20, FESCO's official spokespersons announced acquisition of 95% in Vladivostok Port for at least $180 mln. According to the approved plan, the transaction has two stages. The first provides for FESCO to buy out 50% in M-Port, which holds 95% in VSCP for $90 mln. As part of the second stage, FESCO is to purchase the other 50% in M-Port within the next three years. According to the agreed formula, the buyout price equals 10*EBITDA minus net debt, but at least $90 mln. We do not rule out that the port's current shareholders could acquire an equity position in FESCO's charter capital. The company's spokespersons said that the first stage of the transaction is to be financed using proceeds from the previously floated additional share issue.
According to our estimates, the total cost of the transaction looks overvalued, even taking into account acquisition of 95% in the port. The port's current market price slightly exceeds $50 mln, which implies more than a double control premium. According to our estimates, the fair price of the port is $120 mln, which corresponds to a 50% control premium.
In our opinion, this transaction will not produce any tangible impact on FESCO stock valuations. On the one hand, the company clearly pays extra for the asset, even based on the most upbeat valuation, while on the other hand, the company remains committed to its strategy of establishing a diversified transport operator which should drive up its fundamental value in the future. According to our estimates, this acquisition is squarely in line with the company's previously announced business development strategy. For this reason, we reiterate our Hold recommendation with a target price of $0.73 per share.
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