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. Last Updated: 07/27/2016

Sale of OGK-5 Stake Likely a 3-Way Split

Gazprombank, an unidentified strategic investor and portfolio investors have placed bids for shares in power generation company OGK-5, making the issue four times oversubscribed, a person familiar with the deal said Monday as the book closed for bids in the first of a series of Unified Energy Systems asset sales.

The OGK-5 sale, part of a huge UES restructuring plan aimed at attracting up to $81 billion in badly needed investments to upgrade infrastructure and head off power cuts, is being closely watched to see if private investors or state companies such as Gazprom will end up running the industry.

"It will be sold. It will be a success," the person said, speaking on condition of anonymity because of the sensitivity of the situation. He declined to name the price, which will be announced Tuesday in an official ceremony marking the sale of 14.4 percent of OGK-5 in additional shares. The sale aims to raise up to $484.5 million.

The person confirmed that Gazprombank had bid for the entire issue, but said it would not be allowed to buy all the shares. "It would be totally inappropriate for Gazprombank to get the whole issue," he said.

Portfolio investors had bid for twice the size of the entire issue, he said. He declined to name the other strategic buyer, which Kommersant Daily on Monday speculated was Italian energy giant Enel. A spokeswoman for Enel was unavailable for comment Monday.

Reports of Gazprombank's bid had raised fears that UES had sold out on its original aim of spinning the companies into private hands as it desperately seeks to attract investment. Gazprom is already poised to take control of Moscow's giant utility, Mosenergo. A further expansion of Gazprom's holdings in the sector would go against the grain of UES chief Anatoly Chubais' reform, which originally aimed to privatize generation companies in an effort to boost competition and efficiency.

But several analysts said it looked like cash-rich Gazprombank had been called in to help salvage the sale as portfolio investors weighed the risks. An Interfax report Friday, citing a Gazprombank source as saying the bank would bid, was a clear indication that the bid was mainly aimed at encouraging other investors, analysts said.

"Normally, companies go to markets when they have something to show and when they have clear financial indicators. With OGK-5 this is a risky investment," said Sergei Arinin, utilities analyst at Aton brokerage. "No one knows what the future of the electricity market will be. The current income is fairly low and there are problems with future fuel supplies."

Portfolio investors "all want to buy shares at a discount because they are taking on fairly big risks," he said. Politically sensitive plans to gradually liberalize electricity tariffs have been put on hold until after the 2008 presidential election.

The issue will likely be divvied up among Gazprombank, the other strategic buyer and portfolio investors, analysts said.

Mattias Westman, the head of Prosperity Capital Management, said the entire reform would be thrown into doubt if Gazprom were allowed to buy more. "This would mean money was just going from one state pocket to another. It would not help," Westman said.

OGK-5 offered good scope for future growth, but only if private investors got in on the deal, he said. "If the company can be managed in a more private way, then there can be a lot of cost-cutting. If it goes into private hands, then there's great scope for improvement of the company," Westman said.