Akhmetov Snaps Up Energo Stake

KIEV, Ukraine -- Ukraine’s richest man has significantly increased his stake in a major electricity generating company as the result of a controversial share emission deal that calls into question the state’s sell-off of lucrative assets.

Billionaire Rinat Akhmetov

Shareholders at Dniproenergo, Ukraine’s largest thermoelectric generator, agreed on Aug. 27 to increase the company’s share capital by 52 percent, watering down the state’s 76 percent stake to 50 percent plus one share.

The only company effectively allowed to purchase the new shares was Donbass Fuel-Energy (DTEK), the energy arm of Donetsk billionaire Rinat Akhmetov’s System Capital Management holding company.

DTEK increased its holding in Dniproenergo as a result of the share emission from 8.7 percent to 40 percent, paying a total of $208 million.

The current market value of the shares received by DTEK, however, amounts to around $700 million, with the share price expected to continue rising.

Proponents of the emission, including the government, point to the need to pay off Dniproenergo’s debts.

The Zaporizhya-based company has been debt-ridden since 2003, but it’s unclear exactly how much it currently owes and to whom.

A Zaporizhya court appointed a financial restructuring manager for Dniproenergo, a position that is currently occupied by a former board member of a coal mine owned by DTEK.

“We don’t know the exact debt distribution, though we do know that DTEK’s coal mines are not the largest Dniproenergo debtors. As far as I know, the State Reserve along with Gas Ukraine are the largest,” Dennis Sakva, an energy sector analyst at Kyiv-based investment bank Dragon Capital, told the Post.

Almost 99 percent of shareholders approved the emission during the meeting on Aug. 27, which was attended by a representative of the state.

The government of Prime Minister Viktor Yanukovych, whose Regions parliamentary faction includes Akhmetov as a deputy, approved the emission in June.

Ukrainian President Viktor Yushchenko issued a decree on Aug. 6 ordering the government to prevent asset stripping of state-controlled energy companies by imposing a ban on share capital dilutions.

However, the only politician to have questioned the emission publicly and aggressively is Yulia Tymoshenko, the leader of the opposition Byut faction.

In a statement released by her party’s press service, Tymoshenko asked why the state’s representative had voted in favor of the emission.

“The question is why, on what basis? Why Akhmetov? I have a lot of questions,” she said.

Some analysts say that Dniproenergo will gain from the emission, which will bring the company fresh cash.

If the state had auctioned off the shares in an open tender, the money earned would have gone into the state budget rather than to the company.

In addition, the arrival of DTEK as a strategic shareholder will likely benefit Dniproenergo providing it with access to thermal coal and improving management, analysts said.

Dragon’s Savka, however, believes that DTEK will try to take full control of Dniproenergo, thus reducing the likelihood of a strategic Western investor coming in.

“We don’t expect it to happen soon, maybe closer to 2009. But I would say that DTEK is currently controlling Dniproenergo’s management, as people loyal to it are controlling the company’s supervisory board and can hire or fire almost anyone in the company,” he said.

Dragon estimates the electricity generator to be worth about $2.2 billion, based on the current share price.

Dniproenergo, one of five electricity generating companies in Ukraine, had a net income of $20 million in the first half of this year.

The State Antimonopoly Committee has yet to give final approval to the emission, but no one expects it to be blocked.

In addition to the $208 million it is paying for its increased stake, DTEK has also agreed to invest another $200 million into Dniproenergo.

But the pledge doesn’t appear to be legally binding.

“We didn’t see any legal documents (like contracts) that prove that DTEK will invest another $200 million. The copy of amendments to Dniproenergo’s financial rehabilitation plan state that they need to invest at least $20 million. The financial restructuring manager showed us two copies of letters from DTEK where they agree to invest another $200 million but their legal status is unknown,” Sakva said.

Dniproenergo minority shareholders, whose stakes have been reduced from 15 percent to 10 percent as a result of the emission, could also appeal.

But most are expected to take advantage of a share buyback scheme on offer or hold on to their reduced stakes in anticipation of the share price continuing to increase.

Akhmetov has led the transparency campaign in Ukraine since the country’s Orange Revolution in the hopes of encouraging continuing investment in his aging industrial assets.

Protection of minority shareholders’ rights has also been shown more attention in Ukraine recently.

But shady privatizations in which the state comes out short continue apace in the country.

Earlier this year, the State Property Fund auctioned off a lucrative locomotive plant, LuhanskTeplovoz, for at least half its market value to Russian investors during a highly questionable tender.

Other assets privatized during questionable tenders in years past, such as the Nikopol Ferroalloy Plant, look likely to remain in the hands of their well-connected owners.

In the meantime, tenders for state fixed-line monopoly Ukrtelecom were cancelled several times this summer.

Tymoshenko and Yushchenko touted the transparent privatization of Ukraine’s biggest steel mill, Kryvorizhstal, in late 2005, the same year the two Orange politicians came to power.

After a court decision overturning an earlier privatization of the plant, it fetched $4 billion more in a sale to international steel giant Mittal Steel (now Mittal-Arcelor).

Since then, Ukraine’s privatization record has been less gleaming.

By boosting his stake in Dniproenergo through the bargain emission, Akhmetov could significantly increase the value of DTEK, yielding him the strongest position in the power-generation market in Ukraine’s highly industrialized eastern regions.

At the same time, the commitment of Ukraine’s government to ensure transparent privatization of state assets to the highest bidder to finance the country’s cash-strapped public sector continues to remain in doubt.

Source: Kyiv Post