Daily analyst comments

On January 18 UES's BoD offered the company's management to hold negotiations with NorNickel over the sale of its stakes in OAO TGK-14 (RTS: TGKN), UES's press service reported. The board also decided to possibly to hold an additional share issue to raise investments, although earlier the company had no such plans.

The genco's management already has developed a project in the power and heat generation segment which could be financed using the proceeds from an additional stock offering. UES's management Board has been tasked to ensure that TGK-14's EGM is held by March 4 in order to come to a decision on an additional share issue.

NorNickel currently holds 27.69% of TGK-14 and the power holding owns 33.6% of the generator's charter capital. The metal maker is considering various options to use its utilities assets. We do not rule out that management could make a decision to divest some of them to raise proceeds to finance large acquisitions in 2007 (nickel assets of OM Group and LionOre) and reduce leverage.

At present TGK-14 is one of the most undervalued utilities at a mere USD 420/kW, net debt included. Meanwhile, this metric is average USD 547/kW for the TGK segment. Investors are advised to closely monitor news on TGK-14. If NorNickel makes a decision to divest its stake in TGK-14 coupled with UES interest, we could see another growth driver capable of driving up the genco's stock valuations.

TGK-14 has no other large minority shareholders, except for NorNickel. The strategic investor could therefore gain control over the utility after the acquisition of the state's stake, NorNickel's interest and then exercise a pre-emptive right in the event of an additional stock offering. In order to do this they would have to pay a premium for control that has yet to be priced into the market valuations. As a result, if a strategic shareholder emerges in TGK-14, the company's minority shareholders are entitled by law to the buyout offer at the price which includes a control premium not priced into the current stock valuations.

We assign a Buy recommendation to TGK-14 with a target price of $0.0006 per share.