Daily analyst comments

Interfax announced that the Moscow Court of Appeals No. 9 had nullified a deal for the sale of a UES-owned share package in Nizhny Novogord Retail Co. (RTS: NNSB) to Transneftservice S.

In May 2007, Transneftservice S won an auction for the share package, offering to pay RUB 2.05 billion for 62.3% of common shares, at 49% of the charter capital, in Nizhny Novogord Retail Co., or three times the starting bid. On February 29, 2008, the court began hearings on a lawsuit filed by Sunflake Ltd., an offshore firm, which was the sole owner of Transneftservice S at the time. The lawsuit was lodged on the grounds that the purchase of shares in Nizhny Novogord Retail Co. was not first agreed with Sunflake Ltd, which gives sufficient grounds to cancel the deal by Russian law.

There exist several versions of how the conflict erupted. According to minority shareholders, Transneftservice S has taken advantage of the lawsuit in order to avoid making an obligatory buyout offer. In another version, Transneftservice S shareholders decided not to overpay for the company, or to upload the asset, or to buy the asset at a much lower price, but defer the deal. The version, under which the RUB 2 billion deal was concluded without shareholders’ consent, looks unconvincing, the way we see it.

We believe that the news will have a moderately negative effect on quotations for shares in Nizhny Novogord Retail Co, given that the share prices have fallen significantly since the start of court hearings, having practically reached their pre-auction levels. However, the situation may have an adverse effect on the financial standing of the Federal Grid Company (FSK), which as a legal successor of UES of Russia, will be obliged to return to Transneftservice S the RUB 2.05 billion paid, receiving 49% in Nizhny Novogord Retail Co in return. An outflow of such a significant sum may negatively affect the company’s wide-scale investment program. FSK is likely to hold a repeat auction for the share package. This time, however, we expect lower demand for the shares in NNSB and believe that the auction will be held at a lower price.

Out target price for common shares in Nizhny Novogord Retail Co. (RTS: NNSB) is USD 12.75686 per share, which corresponds to a HOLD recommendation. Our target price for the prefs is USD 7.65412 per share, which corresponds to a BUY recommendation. We currently have no official recommendation for shares in the Federal Grid Co. (RTS: FEES).