Analysts interviewed by the Kyiv Post were unanimous in evaluating the privatization of Donbasenergo, “It’s the most profitable deal ever!”
Igor Gumenyuk, the new company owner, had all the reasons to uncork a bottle of Dom Perignon on Aug. 21, when he acquired an entity generating weighty income at an enormously cheap price. State Property Fund probably had been thinking of anything but making a profit while selling Donbasenergo.
The list of Donbasenergo’s assets is rather short – it operates two coal-fired power stations in Donetsk Oblast, however its revenue is truly impressive. Only two companies participated in the privatization auction – Energoinvest Holding and TehNova – since the conditions to enter the competition were overcomplicated. Why did the government set such rules, if Donbasenergo is economically efficient and could be sold at a higher price with more buyers participating?
Putting the questions aside, here are the facts: Energoinvest Holding controlled by Igor Gumenyuk paid only Hr 719 million for 60.77 percent stake at Donbasenergo. This is the cheapest price in relation to production capacity paid for the power generating company, mentions Oleksandr Parashchiy, head of Concorde Capital’s analytical department. Donbasenergo’s price-earnings ratio is around 2.7, meaning that company will compensate its acquisition cost to Energoinvest Holding for less than three years, which makes it a fantastically gainful deal.
Gumenyuk, a former member of parliament and devoted tennis player, held the CEO position at ARS, a coal trading company founded by billionaire Rinat Akhmetov, a major actor in the Ukrainian energy market and Viktor Yanukovych’s Party of Regions. Personal connections remain one of the main factors of government’s decision-making, thus leading to foreign investors’ unwillingness to participate in the privatization process in Ukraine, as they fear to enter the market with a substantial lack of transparency.
TehNova, Energoinvest Holding’s competitor for Donbasenergo, is suing the auction results in court. Kyiv Commercial Court officially started the case examination on Dec. 5, the process is ongoing. However, Dragon Capital’s senior analyst Denys Sakva suggests, this is a pure fiction – Donbasenergo’s owner wants to get the court’s decision to legitimize privatization of the company. Ultimately, the Supreme Court of Ukraine could be asked to weigh in. If Gumenyuk wins the case, his ownership over Donbasenergo may not be questioned within the Ukrainian court system in the future.
Before the privatization of Donbasenergo took place, the government approved two big investment projects worth Hr 9.2 billion for the company. Despite the ownership change, the investments have not been cancelled, meaning that government is subsidizing the modernization costs for the privately-owned company.
Donbasenergo has a special tariff for its energy production which is higher than the regular one. Energorynok, the state enterprise in charge of electric power supply optimization, buys electricity from energy generating companies to provide it for the customers. The price it pays to the companies depends on the tariff size established by the regulator, thus Donbasenergo is receiving a disproportionately large piece of the energy market’s revenue pie. Basically, low production-cost, state-owned nuclear plants along with the customers all over the country subsidize the construction of new blocks at privately-controlled Donbasenergo power stations.
However, company’s technical efficiency is quite low and its power stations coal demands are high, Dragon Capital investment company says in the report. Donbasenergo is in urgent need of modernization, just like the whole industry. Since the collapse of the USSR in 1991, Ukrainian power generating companies have not built a single new coal block. The country’s energy suppliers are still making their revenues using Soviet industrial heritage.
Luck was on the Donbasenergo stockholders’ side in 2013. The energy company’s share price grew approximately by 25 percent last year, driven by the entity’s outstanding financial performance. It doubled its net profit, reporting Hr 645 million for three quarters of 2013. And the most probable scenario implies further growth, analysts say. ”Donbasenergo’s shares are worth buying in 2014,” stock market expert Volodymyr Pozniy admits. Shareholders are expecting generous dividends from the company – Hr 10 to 19 per share, while the current share price is around Hr 30, which is lower than the historical average, meaning that securities are still relatively cheap. Not only Donbasenergo’s price, but also dividends it is going to pay are beating the records.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected]
