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Roskommunenergo is prepared to go ahead with a deal to buy into OGK-1 on the original terms, and is waiting for approval from the Russian Energy Ministry, Interfax cited OGK-1 board chairman Igor Kozhin as saying. Market participants earlier feared that the deal might remain earthbound, unless its terms were revised, or might be indefinitely postponed. It is now much more likely that the deal will be completed on the original terms.

OGK-1 is the only genco for which UES of Russia had failed to find a new owner ahead of its liquidation. The genco has since found it much harder to implement its investment program, as funding was to have been partly raised via an additional share issue. As planned, a strategic investor was to pick up both additionally-issued shares and those that belonged to the state as a UES shareholder. As a result, the Federal Grid Company (FGC) took over 43% in OGK-1 from the state and RusHydro another 23%. On the last day of the holding company’s existence, its ex-head, Anatoly Chubais, said a unilateral deal had been concluded with Roskommunenergo on selling it OGK-1 shares at USD 516 per kilowatt of installed capacity, or RUB 2.6 per share. However, the deal has since stalled due to the need to conduct a due diligence probe into the company.

The statement made by the OGK-1 board chairman has markedly enhanced the chances that the deal will eventually be completed on the original terms in the mid- term. There are several more factors that make this likelihood quite real. To begin with, OGK-1 cannot draw debt financing for its program indefinitely, the more so since spare funds are increasingly harder to secure on debt markets in the face of the global financial crunch. Secondly, FGC and RusHydro need financing for their own investment programs as soon as they sell their stakes in OGK-1 to a strategic investor. Should OGK-1 be sold on the cheap, or if the deal drags on for a lengthy period, FGC and RusHydro may run into difficulties financing a series of projects. Finally, as the deal was reached with Roskommunenergo, financing guarantees were provided for the deal. In view of all this, we believe that the Energy Ministry will give the go-ahead to the deal before the end of 2008. Should this be the case, a buyout offer should be made to OGK-1 minority shareholders at RUB 2.6 per share, a price exceeding the current stock valuations by more than 275%.