Research Notes

The general shareholders' meeting of Industrial and Construction Bank (PSB; 75%+3 shares are owned by Vneshtorgbank) adopted a decision on September 22, 2006 to merge with VneshtorgBank. However, the merger decision is yet to be finalized by VneshtorgBank's ESM on October 19, 2006. Based on the swap ratios for conversion of PSB's shares into VneshtorgBank's stock and independent estimates which put VneshtorgBank's value at $11.6 bln, the approximate values of PSB's shares are $0.86 (conversion) and $0.82 (buyout), i.e. PSB's shares trade at more than a 30% discount to the current market price.

According to our estimates, VneshtorgBank's market capitalization could be in the range of $15.7-18.2 bln, based on a comparison with its ЕМ peers and Sberbank based on the P/BV-2006 multiple.

Our preliminary estimate of VneshtorgBank's market cap by the IPO deadline puts its share price at $1.16-$1.35, which means the average fair price of PSB's shares is $1.25. In our opinion, the safest strategy now is to sell PSB's shares at the current stock market price; the conversion option, however, could also make sense, provided the market values VneshtorgBank's shares significantly higher during the IPO and further down the road than the independent estimates.

Olga Belenkaya

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