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. Last Updated: 07/27/2016

E.On, Gazprom Strike Power Deals

VedomostiE.On head Wulf Bernotat speaking with Gazprom chief Alexei Miller last year.
German utility E.On and Gazprom agreed to spend a combined 217.6 billion rubles ($8.6 billion) to gain control of a power generator apiece as the state exits the industry.

The companies made the highest offers in separate bids for shares in two units of national utility Unified Energy System. E.On bid for at least 69 percent of OGK-4 and Gazprom for a minimum of 47 percent in TGK-1, UES chief executive Anatoly Chubais said Saturday.

"The Russian, or Soviet, power industry has never seen anything like this; it's a record," Chubais told reporters Saturday.

E.On offered $753 per kilowatt of installed power capacity, the highest bid ever submitted in Russia, he said.

The government will split up UES by July to increase competition and raise $120 billion needed to upgrade and expand power generation and the grid. The state utility raised more than $8 billion from four share sales in three generating companies, or gencos, before Saturday's transaction.

"With increases of 5 percent annually, Russia is one of the largest and fastest growing energy markets in the world," E.On said in a statement. "E.On's long-term goal is to build up a strong position" in Russia.

Sales of Moscow-based OGK-4 and TGK-1, based in St. Petersburg, are being conducted in two parts. The next stage will be the sale of new shares by the power companies. The government on Friday auctioned its stakes, which it owns via a 52 percent holding in UES.

The country's power industry needs more investment in its infrastructure, said L?der Schumacher, an analyst with Dresdner Kleinwort in London who has a "buy" rating on E.On shares.

"President Vladimir Putin has said that not having sufficient power capacity has cost the country 5 percent of GDP growth in recent years," Schumacher said. "An awful lot of investment is needed in the power sector in Russia. I think this gives you a certain amount of political protection."

E.On offered 3.35 rubles (13 cents) per share in OGK-4. The D?sseldorf-based utility will pay Russia 100 billion rubles for 29.8 billion state-owned shares and bid for all of the newly issued shares. UES will retain 22.5 percent in OGK-4.

E.On probably made the investment because of OGK-4's earnings potential in four years, said Dmitry Tsaregorodtsev, an analyst with KIT Finance. "Once Russia liberalizes electricity prices by 2011, the company is not a golden hen but a diamond one."

Apart from selling power plants, UES has also put its 23-story Moscow headquarters up for sale. Spokesman Timur Belov said in August that the company plans to sell the building and the lease to the 2.5-hectare lot on which it stands in the fourth quarter.

Gazprom offered 0.035 rubles per share for TGK-1, or $710 per kilowatt of capacity. The gas producer will pay the state 38.7 billion rubles ($1.5 billion) for 1.1 trillion shares and seek to buy as many as 925.7 billion new shares. UES's stake will drop to 13.6 percent in TGK-1.

"I'm happy with the OGK-4 price, it's an old asset and there are a lot of uncertainties," said David Herne, a former UES director who manages $500 million including power assets at Halcyon Advisors in Moscow. "This is embarrassing" for TGK-1, he said. Herne estimated TGK-1's value at $900 per kilowatt of capacity.

Enel, Italy's biggest utility, paid $669 per kilowatt of installed capacity for genco OGK-5 in a June auction. Norilsk Nickel's price for genco OGK-3 was $601 per kilowatt, and the rest were sold at about $500.

The final figures for the size of the stakes Gazprom and E.On will acquire will be announced Sept. 25, Yury Makushin, chairman of OGK-4, said at Saturday's briefing.

"UES wants to see one, single strategic investor acquire control in each company," Makushin said.