RWE Picks Up Stake in TGK-2 for $400M

Germany's RWE took effective control of one of three large Russian power producers in which stakes were sold Friday, making it the fourth European utility to become a major player in the sector.

The assets are being sold off by former electricity monopoly Unified Energy System, which is being broken up into dozens of independent firms as part of a sweeping power-sector reform.

The reforms were undertaken in 2003 to introduce competition to the power market and raise investment for a $125 billion overhaul of the country's aged power systems.

But in a partial reversal of the reforms, a few Russian industrial giants, including Integrated Energy Systems, the investment vehicle of metals and oil magnate Viktor Vekselberg, have bought up the choicest UES assets, threatening to dominate and partly remonopolize the sector.

Aside from RWE, foreign firms allowed to participate in the selloff of UES assets include Italy's Enel, Germany's E.On and Finland's Fortum .

RWE paid $568 per kilowatt of TGK-2's generating capacity, the terms in which these assets are traditionally valued.

This is far less than the $690 per kilowatt that Enel paid for OGK-5, the $753 per kilowatt that E.On paid for OGK-4, and the $767 per kilowatt that Fortum paid for TGK-10.

RWE, with junior partner Sintez Group, a Russian utilities investor, paid 9.3 billion rubles ($392.6 million) for the state's 33.5 percent stake in TGK-2, which operates in northern and northwestern Russia, including the Arkhangelsk, Novgorod, Tver, Vologda, Yaroslavl and Kostroma regions.

UES said RWE also committed more than 9 billion rubles more for the purchase of TGK-2's new shares to be issued next month, giving it effective control of the firm for a total of around 19 billion rubles ($802 million).

The sale price of 2.5 kopeks per share implied a value for the company of $568 per kilowatt of capacity.

TGK-2 was down 7.9 percent on the MICEX exchange.

UES will retain a stake of 11.4 percent in TGK-2.

Russia-focused fund Prosperity Capital Management holds about 27 percent in the regional producer.

Vekselberg's IES, also known by the Russian acronym KES, paid 11 billion rubles ($463 million) for the government's stake in TGK-6, with New Russian Generation as a junior partner.

The price of 2.5 kopeks per share of TGK-6 implies a value of $437 per kilowatt of generating capacity.

New Russian Generation is a utilities investment fund owned by Prosperity Capital Management, which already owned 18.9 percent of TGK-6 before the sales.

IES owned 19.7 percent of TGK-6 before the sale.

UES said it would raise an additional 14.25 billion rubles from the sale of new shares, bringing the combined price of the new shares and the government's stake to 25.23 billion rubles ($1.07 billion).

TGK-6 provides heat and electricity to regions to the east and southeast of Moscow, with stations in the Nizhny Novgorod, Vladimir, Ivanovo and Penza regions.

TGK-7, which serves regions around the Volga River, priced its secondary public offering of 12.9 percent of its share capital at 2.89 rubles per share.

The price implied a value of $456 per kilowatt of capacity and put the market capitalization of the company at $3.14 billion, it said in a statement Friday.

The bid put in by Vekselberg's IES may allow it to buy the entire volume of the share sale, a source close to the sale said Friday.

The government's stake in TGK-7 is to be sold by early May, and IES is expected to bid for it with Prosperity Capital's New Russian Generation fund, giving them control of the firm.