Akhmetov’s shopping spree
The latest wave of non-competitive Ukrainian privatizations of multibillion-dollar energy assets has left at least one Ukrainian happy. The auctions to sell stakes at three power generation and one distribution company has vaulted Rinat Akhmetov, the nation’s richest person, to the status of near-monopolist when it comes to generation, distribution and export of electricity.Experts question the transparency of tender conditions that left little chance for foreign investors to compete with Akhmetov, a close ally and supporter of President Viktor Yanukovych and a lawmaker in the pro-presidential Party of the Regions.As a result, they say, the selling price of the assets was considerably lower than the price Ukraine’s cash-strapped budget would receive if free-market mechanisms and competition were in place.Such is the example of a recent energy-company privatization in Poland, where less the public offering of less than a 12 percent stake in a local power company brought in just a little less than the revenue earned by Ukraine’s budget from Akhmetov’s entire shopping session.DTEK is the energy arm of the Akhmetov-owned System Capital Management, one of Ukraine’s leading financial and industrial groups. CEO Maxim Timchenko did not have a response by the time this edition of the Kyiv Post went to press on Jan. 26, but agreed to an interview when he returns next week from the World Economic Forum in Davos, Switzerland.
According to the estimates of Dennis Sakva, senior analyst at Kyiv-based investment bank Dragon Capital, the privatizations have put DTEK in control of 33 percent of the country’s total generation capacity and 28 percent of electricity generated. As for thermal generation, the holding now controls 54 percent of installed capacity and nearly 70 percent of domestic sales on the competitive segment of the market.
Dniproenergo, now owned by Ukraine’s richest man Rinat Akhmetov, is the largest thermoelectric generation company in Ukraine and one of the biggest in Europe. It produces electricity at three separate power stations, inlcluding the Kryviy Rih Thermoelectric Generator. (Viktor Melnychenko)In early 2012, DTEK became a winner of four privatization auctions selling some of Ukraine’s last remaining blue chips, power generation and distribution companies. In two of them – for the blocking stakes in Dniproenergo and Zakhidenergo, the nation’s first and third largest power generators, respectively – DTEK was the sole bidder.DTEK has already paid $242 million for a 45 percent stake in Zakhidenergo, boosting its minority stake in the billion-dollar company to a majority interest. At the time this issue of the Kyiv Post went to print, Akhmetov’s company hadn’t yet finalized the purchase of Dniproenergo due to the lengthier technicalities of a sole-bidder auctioning procedure.However, DTEK is expected to pay slightly more than its offer, $147 million for a 25 percent stake in Dniproenergo. Sealing this deal will boost the group’s pre-existing 47 percent stake – acquired years earlier through a controversial share dilution – to a majority one. In the other two, for the stakes in Kyivenergo, the power producer and supplier in Ukraine’s capital, and Donetskoblenergo, an eastern Ukrainian distributor, Akhmetov encountered little competition from the companies affiliated with Ukrainian billionaire Igor Kolomoisky and others, who soon dropped out.
Akhmetov also got Kyivenergo for what analysts say was a bargain price: $56 million for a 25 percent stake that brought the group’s interest up to 71 percent. Just around $59 million was paid for a 40 percent stake in Donetskoblenergo, increasing DTEK’s interest to over 70 percent.Akhmetov’s domination over the country’s energy sector was made even stronger by the results of the recent awarding of the rights to export electricity generated in Ukraine, where his companies ended up winning 70 percent of the slots.Such a swift and massive takeover of some of the country’s most attractive energy assets raises many questions. Experts point to highly controversial decisions by the government to privatize non-controlling stakes in all of the companies, a decision positive for DTEK, already a shareholder in all of the companies put up for sale.As Yuriy Korolchuk, an expert at Kyiv-based Institute for Energy Studies, puts it, it is “absurd” and “lacking any logic” to privatize the power generators now, given the economic downturn and significant decrease in prices of Ukrainian assets.“It looks rather like selling off the assets just because Akhmetov wanted to buy,” Korolchuk says. “Most likely … he wanted to concentrate shares in his hands.”DTEK and Akhmetov, who has built up Ukraine’s largest business group largely by snapping up Soviet-built assets through controversial privatizations, have repeatedly denied wrongdoing. But the selling prices that the government got for the latest round of energy privatizations, according to Korolchuk, were “obviously” below value.Pointing to the example of Kyivenergo, Korolchuk says that the company’s real price can be up to five times higher than the $56 million Akhmetov paid for 25 percent of its shares.
Dragon Capital’s Sakva thinks such estimates of Kyivenergo’s actual worth might be exaggerated due to the dire financial state of the company.Still, in his opinion, if the government really wanted to attract the widest number of investors as possible and receive the maximum price, officials should have put the controlling stake up for sale.Sakva explained that the offer of smaller stakes is simply unattractive for strategic foreign investors. They would essentially buy burdensome investment obligations to invest into the companies, but would not be given control over them in return.“Now, we have what we have,” says Sakva. “Monopolization is always bad and makes everyone’s life tougher.”At the same time Inna Stetsenko, spokesperson for Ukraine’s Antimonopoly Committee disagrees, as she states that according to her agency’s analysis DTEK’s share of Ukraine’s energy market hasn’t reached the landmark 33 percent necessary to qualify it as a monopoly. Therefore, the Antimonopoly agency allowed the purchase.Oleksandr Ryabchenko, head of Ukraine’s State Property Fund, also quite expectedly defended the government’s pricing decisions by saying that, on average, the starting prices for the energy companies was 40 percent higher than the market prices, which were based on stock prices from Ukraine’s illiquid and low volume stock exchange rather than peer comparisons with similar assets in other countries.In a recent Kyiv Post interview, DTEK’s CEO Maxim Timchenko gave his assessment of the value of the assets ahead of the sale. Speaking last September specifically about Zakhidenergo, in which DTEK bought a stake in early January, he said: “Its [market] capitalization on the Ukrainian stock market is $296 million.It used to be around $1 billion,” Timchenko said. “So, what is the true [value], today’s or yesterday’s? Until we start trading DTEK’s stocks in New York, London or elsewhere, it’s difficult to say.”
A brief look at the privatization in the neighboring Poland might provide a clearer picture. In March 2011, 11.9 percent in Tauron Polska, the country’s second largest power generation company, was sold on Warsaw Stock Exchange for $458 million at the then-exchange rate. This is only $46 million less than DTEK paid for much larger stakes in all the four energy companies combined.Interestingly, while its capacity is nearly half that of Dniproenergo, its sales revenues in 2010 exceed the Dnipropetrovsk-based energy giant almost six-fold.“This is the results you can achieve in energy privatizations for the companies operating at free liberal markets with transparent conditions with participation of foreign investors,” says Sakva.Following the sale, DTEK emphasized considerable investment the energy giant needs to put into the assets. According to Timchenko, Kyivenergo would require up to up to $1.9 billion of total investments, an additional $1.3 billion needs to be put into Zakhidenergo while Donetskoblenergo will require nearly $200 million.Experts do not rule out that part of these funds might come through tariff increases, especially given that Timchenko has for some time voiced the need for leveling out the tariffs for private customers and businesses, as lower tariffs for households are currently being subsidized by businesses.While acknowledging that it might sound like bad news for the consumers Korolchuk says increasing the tariffs is actually the right way to go. “There will be an objective demand by the owner to include the investment surcharge into the tariffs,” he said.Overall, in Sakva’s opinion, the current privatization of the energy assets by DTEK, might actually turn out to be a lesser evil, as keeping these power generators in the government’s hand might actually have much graver consequences. “Without the massive reconstruction we are all going to face major problems in the industry as a whole,” says Sakva.Yet, Alexander Valchyshen, head of research at Kyiv-based investment bank ICU feels no special optimism about the latest wave of Ukraine’s privatization. While acknowledging the need for privatization to roll on, he would have liked to see competition from European institutional investors, such as pension funds, and for them to end up holding such a great chunk of Ukraine’s energy.But, as he admits, given the present situation in the country and the virtual failure of Ukraine’s European Union integration plans, both politically and economically, such a situation seems like a utopia. “Due to the lack of transparency, European investors – which I consider the most efficient owners – will simply not be interested,” Valchyshen added.