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. Last Updated: 07/27/2016

Enel Raises Its Stake in Utility OGK-5 to 37%

MILAN -- Italy's Enel said Thursday that it had bought more shares in wholesale power generator OGK-5, raising its stake to 37.15 percent and opening the way for a tender for the rest of the wholesale power generator.

Taking control of the rest of OGK-5 would make Enel the first foreign company to own a power utility in Russia.

The tender is part of Enel's plans to invest up to 4 billion euros ($5.69 billion) in Russia as it seeks to expand outside its home market, where growth has become more difficult.

In a statement, Enel said it had paid 10.8 billion rubles -- or about 304 million euros -- to Credit Suisse for around 7.15 percent in OGK-5. The purchase price was equivalent to 4.26 rubles per share, it said.

It paid roughly $690 per kilowatt hour of OGK-5's installed generating capacity.

Enel became the first strategic investor in the sector in June, when it bought a 25 percent stake in OGK-5 from former power monopoly Unified Energy System at an open tender, bringing its stake to 29.9 percent.

Now that its stake is larger than 30 percent, corporate law obliges it to make a buyout offer to minority stakeholders.

In August, Enel got permission from the competition regulator to consolidate a controlling stake in OGK-5, for which analysts say it will have to pay a hefty premium.

"A good benchmark of what these things are worth is around $500 [per kilowatt hour of capacity]," said Derek Weaving, senior utilities analyst at Renaissance Capital.

But in September, Germany's E.On purchased control of OGK-4 for a record $750 per kilowatt hour, and Enel paid around $660 per kilowatt hour in June, even though electricity prices will be kept below market levels until the end of the reforms in 2011.

"These [foreign] companies are prepared to pay very high premia for control of companies that don't yet make a profit," Weaving said.

"You have to be very optimistic in all of your assumptions, on the full implementation of reforms, on the establishment of a truly fair competitive market, to justify these prices," he said. "These companies must be very cash rich."

OGK-5 has four thermal plants with a total capacity of 8,700 megawatts in regions where demand for electricity is outpacing capacity.

Enel was also the first foreign firm to run a Russian power plant, taking over management of the Northwest plant near St. Petersburg in 2004, a role it left this September to focus on OGK-5.

Though Enel did not own a stake in the Northwest plant, it saw to the installation of a new turbine ahead of schedule and improved fuel efficiency, winning clout among Russian electricity officials.

The managing director of the plant, Georgio Cimini, said he would play a leading role in the management of OGK-5, but declined to specify his future title.