Russia's InterRao sells OGK-5 stake for up to $750 mln

Reuters, 02.03.2012
• InterRao had signaled sale of stake in Enel-controlled utility

• Private equity group includes Russian state-backed fund

• Deal comprises $625 mln cash, $125 mln performance component (Updates with confirmation, RDIF comments)

MOSCOW, March 1 (Reuters) - Russian power group InterRao has agreed to sell its minority stake in Italian-controlled power generator Enel OGK-5 to a private-equity investor group in a deal worth up to $750 million, the parties said on Thursday.

The buyer group comprises Xenon Capital Partners's Rusenergo Fund, the Macquarie Renaissance Infrastructure Fund and the state-backed Russian Direct Investment Fund, co-investing in its second deal since its creation last year.

The sale would rid state-controlled InterRao of the unwanted 26.4 percent stake in OGK-5 it received from the Russian state via a capital hike last year and raise cash for investment in its Russian generating assets.

"InterRao is strictly following its strategy to 2015, and the deal to sell the blocking stake in Enel OGK-5 is in line with our asset management plans," Chief Executive Boris Kovalchuk said in a joint statement.

The transaction comprises a payment of $625 million on closing, with further potential upside of up to $125 million if a target for internal rates of return of 18 percent were exceeded, according to a joint statement.

InterRao will also receive a carried interest of 20 percent of the profits earned by the investment consortium.

Italy's Enel, which acquired a 56.4 percent stake in OGK-5 as part of reforms to break up Russia's Soviet-era power monopoly, was not a party to the transaction.

"Enel OGK-5 is a quality asset with low debts and a world-class partner in the form of Enel," said Natasha Tsukanova, previously JP Morgan's top investment banker in Russia, who founded energy investment boutique Xenon in 2009.


The deal marks something of a coup for the RDIF, which will co-invest up to $10 billion over the next five years in a bid to promote private-equity deals and lift investment rates in Russia that are around half of faster-growing China's.

The OGK-5 transaction is the RDIF's second deal after it, together with the European Bank for Reconstruction and Development, bought a 7.5 percent stake in Moscow's MICEX-RTS bourse for $300 million.

"Of the whole consortium we provided only one-quarter of the money going in," RDIF head Kirill Dmitriev told Reuters, referring to the fund's requirement for its partners to at least match it on investments, dollar for dollar.

"We are entering at a very attractive valuation, with good downside protection," he added. "We believe the sector will grow and more people will come to appreciate its potential." Power-sector stocks in Russia have been hit by regulatory changes and delays in hikes in power tariffs widely seen as a sop to voters ahead of a presidential election this Sunday that Prime Minister Vladimir Putin is poised to win.

Investors who are bullish on the sector argue that market forces must eventually prevail if Russia's economic development is not to be constrained by shortages of power generating capacity. InterRao signaled last August that it wanted to dispose of the non-core stake in OGK-5, while its most senior director said in November it would seek a deal with investment funds. Although the deal values the stake at an 8 percent premium to the market, InterRao will take a paper loss on the transaction compared with the valuation at which it received the OGK-5 stake. "It's positive that the holding company is fulfilling its promises and disposing of assets," said VTB Capital sector analyst Mikhail Rasstrigin.

"For InterRao it's good that they sold the shares at a premium to the market, but not so good that the price was below the book value at which it received the stake from the state." The deal is subject to regulatory approval. OGK-5 shares closed down 0.5 percent on Thursday at 2.145 roubles. The stock has gained 15.5 percent this year.