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. Last Updated: 07/27/2016

Enel Pays $1.5Bln in UES Auction

Italian utility Enel scooped up a blocking stake in OGK-5 on Wednesday for $1.52 billion, driving up valuations in the power sector by paying an unprecedented premium of 18 percent to the market price.

In a climate of tightening state control over strategic industries, Unified Energy System's sell-off of all its assets is the country's last large-scale privatization, and foreigner investors have not made many inroads into the power sector yet.

"We are so happy that it was Enel," said UES spokeswoman Tatyana Melyayeva. "Yes, because they are a foreign company, but also because they have real experience working in Russia."

The purchase of the 25.03 percent stake in OGK-5 in Yekaterinburg will bring Enel's exposure to the Russian power sector to $4.4 billion.

"With OGK-5's acquisition we delivered on our strategy to develop a strong, balanced, integrated position in the energy sector in Russia," Enel CEO Fulvio Conti said in a statement.

Enel's foreign competition at the auction came from Germany's E.On utility, while from the Russian side, bids came from Novatek, Russia's second-biggest natural gas firm, and United Company RusAl, the world's largest aluminum producer. The amounts of the other bids were not announced.

Gazprom and Norilsk Nickel are seen as the main contenders to buy up UES assets, but they did not bid in Wednesday's auction. In March, Norilsk Nickel paid a 13 percent premium for a large stake in OGK-3.

Whereas the average price for a kilowatt of installed capacity is around $543 in Russia, Norilsk paid $602 per kilowatt in March, and now Enel has paid $664 per kilowatt, Alfa Bank said in a note to investors.

"Enel paid so much because they know they'll never have another chance at such a big stake," said Dmitry Terekhov, utilities analyst at Antanta Capital.

OGK-5's stock gained 2.9 percent Wednesday.

Enel will become the second foreign company that can block board decisions at a Russian power-generating company. The other is Finland's Fortum, which owns 27 percent of TGK-1 in the Leningrad region.

Enel's expansion has been brisk. In April, it teamed up with Italy's largest oil firm, Eni, to buy a choice batch of former Yukos assets for $5.83 billion. It also snapped up a 49 percent stake in power distribution firm Rusenergosbyt for $105 million last year, and has managed the Northwest Power Plant near St. Petersburg since 2004, but owns none of it.

"At Northwest, we have been trying to learn the Russian system, and our experience will be very useful for Enel," Georgio Cimini, the general director of the Northwest plant, said by telephone.

His experience has not always been rosy, however. Most of Cimini's decisions had to be approved by state or UES officials during his first year on the job, and he said Enel would still have to work within the confines of Russian bureaucracy. "But what drives us is the business side, which will continue to improve."

Local investment banks agreed with that sentiment, rushing out notes with bullish forecasts for the sector.

But some problems for Enel may come from its financial commitments to UES and OGK-5. Before investing in a UES asset, all investors must sign a memorandum promising to carry out that asset's investment program.

OGK-5, which has an installed capacity of 8,700 megawatts, plans to invest $2.2 billion in 2,460 megawatts' worth of new turbines. As a whole, the nation's power system needs some $120 billion in repairs and expansion.

Melyayeva said UES would hold Enel and all of its strategic investors to these plans, even though the UES board of directors failed during a May 28 meeting to set up a precise mechanism for doing so.