Research Notes

UES Stocks – A Unique Arbitrage Opportunity Offered by UES Restructuring

The energy holding's restructuring has been a complicated and twisty process, but eventually it is coming to a logical close. We think that right now the market does not quite efficiently assess the state of affairs about the upcoming spin-off of WGC-5 and TGC-5 from the energy concern this September. We advise investors to take advantage of the current opportunity to reap arbitrage gains. The point is that the buyout price for UES stocks, which was approved this July, suggests that the company's shares will be valued after WGC-5 and TGC-5 have been spun off. This, as we suppose, is not fully realized by the market.

WGC-5 and TGC-5 will be spun off from the energy holding on September 3, 2007. Table 1 shows the ratios, at which UES shareholders as of the day when WGC-5 and TGC-5 are factually detached will receive shares of these companies as part of the completion of the first phase of the power holding's restructuring.

Table 1. Ratios for WGC-5 and TGC-5 stocks

Type of stock	WGC-5 common shares	TGC-5 common shares
1 common stock of UES	0.41185	13.59499
1 preferred stock of UES	0.37717	12.45029

Source: UES data, Finam estimates

It's important to note that WGC-5 and TGC-5 stocks are not to be swapped for those of UES, as shareholders will receive them in addition to UES shares they already own in proportion to their holdings in the energy monopoly's charter capital. No extra payments are required from UES shareholders for the stocks to be received in the course of spin-off procedures at WGC-5 and TGC-5.

In July 2007 UES BoD set the stock buyout price for those shareholders who at an October 26, 2007 EGM will vote against UES' restructuring or fail to cast votes and accept the buyout offer. The buyout price was approved at Rub 32.15 per common and Rub 29.44 per preferred share of Russian electricity holding UES. Thus, the market has quite reasonably viewed these buyout prices as a level of support for the energy holding's stock valuations.

However, it's important that the stocks will be bought out within 45 days after the October 26 EGM and the stock buyout price approved in July suggests that UES stocks will be valued after WGC-5 and TGC-5 have been spun off. In line with our calculations shown in Table 2, the adjusted support level for UES stocks puts the price of common shares at Rub 34.18 and Rub 31.31 for preferred shares. This means that taking into account the current market value of WGC-5 and TGC-5 stocks, which a UES shareholder will receive after the first stage of the holding's restructuring is complete, the support level for UES shares should be assessed 6.3% higher than the approved buyout prices.

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Simon Birg

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Sector: Power Utilities
Company: UES

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