Emission deal raises concerns

Concern for the rights of minority shareholders in Ukraine is again being raised, as the country’s richest man looks set to expand his energy assets.

Companies controlled by Ukrainian billionaire Rinat Akhmetov are expected to come out the winner of a controversial share emission deal at a major electricity-generating enterprise in which the state is the primary stakeholder.

A plan to increase by 52 percent the number of shares in Dniproenergo, which boasts the country’s second largest power-generation capacity, was approved by the government on Monday, June 18.

The emission would dilute the state’s stake from 76 percent to 50 percent plus one share, but the government has cited the need to pay off Dniproenergo’s significant debts.

Akhmetov’s share in the company, according to investment analysts, would increase from around 9 percent to about 40 percent.

With Dniproenergo’s stock price taking a nosedive since the news of the emission was announced, the fate of the owners of the other 15 percent of the shares freely traded on the market is uncertain.

Almost a year to date, minority shareholders in a major Ukrainian steel mill under private ownership had their stakes washed away in another controversial share emission.

Ukraine’s privatization body, the State Property Fund (SPF), has already sounded the alarm. However, analysts say greater private ownership in financially challenged Dniproenergo, headquartered in Zaporizhya Region, could eventually raise share prices and compensate the state for its decreased stake.

According to market watchers, Donbass Fuel-Energy [DTEK], the energy arm of Akhmetov’s System Capital Management holding company, has proposed to help Dniproenergo handle its debt problem in exchange for a larger stake in the electricity generator.

If the proposal goes through, the share emission would be a closed one.

Kyiv-based investment bank Dragon Capital said in a report released earlier this week: “As a possible scenario, two DTEK-owned coal companies, Pavlohradvuhillya and Komsomolets Donbassa may create a special-purpose vehicle that will be merged with the generator by contributing $200 million to repay Dniproenergo debts in exchange for a 34 percent stake in the generator. In addition, DTEK promises to invest another $200 million to upgrade the generator’s capacity over the next five years.”

Exactly how much Dniproenergo owes to whom is still uncertain, but the company has been under threat of bankruptcy proceedings since 2003, when a Zaporizhya court recognized $275 million worth of debt to 65 creditors, Dragon said in its report.

The court also appointed a financial restructuring manager for Dniproenergo, a position that is currently occupied by a former board member of a coal mine owned by DTEK. DTEK has yet to make any official announcements, but analysts predict other shareholders – the state and the general public – are not intended to take part. The market has supported this prediction, with share prices for Dniproenergo falling drastically upon news of the government’s decision.

“Over the last two days, the shares fell around 18 percent. And they could fall even further from 4 to 25 percent, Dragon’s chief strategist Andriy Dmytrenko told the Post on June 19. The news also caused a drop in share prices for other Ukrainian energy companies traded on Ukraine’s main exchange, the PFTS.

The SPF has also reacted strongly to the news, with SPF head Valentyna Semenyuk insisting that the state should be allowed to buy into the additional emission.

“The share of the state should be preserved. Heaven forbid it is decreased,” she said on Wednesday, June 20.

However, according to Oleksandr Parashchy, an analyst at Kyiv-based investment bank Concorde Capital, the state may come out ahead from the share emission, as it will retain a controlling stake in a more financially healthy Dniproenergo.

“For the company itself, it’s a big plus, because they get their [debt] problems solved plus an investment pledge,” he told the Post.

If the shares from the emission were sold openly, the state would put its share of the take into the budget rather than cutting company debt or investing in modernization, he added.

Analysts at Dragon agree: “The arrival of DTEK as a strategic shareholder may benefit Dniproenergo by providing it with access to thermal coal and improving management, which has proved very efficient at the much more profitable DTEK-owned Vostokenergo.”

But, they note DTEK is likely to try to take full control of Dniproenergo, thus reducing the likelihood of a strategic Western investor coming in.

As for the unknown owners of the remaining 15 percent of the shares, it’s unclear what price they will be able to get for them if Dniproenergo stock continues to fall.

Parashchy estimated Dniproenergo’s worth at almost $1.5 billion. Dniproenergo is one of five electricity generating companies in Ukraine, in addition to VostokEnergo, CentralEnergo, ZakhidEnergo and DonetskEnergo.

Akhmetov, ranked as Ukraine’s richest man, has made serious efforts to improve the transparency and image of his SCM in the West, where he has courted financing to modernize his aging Soviet assets.

On the one hand, it wouldn’t be in his interests to spook investors. On the other, however, boosting his stake in Dniproenergo through a bargain deal could significantly increase the value of DTEK, yielding him the strongest position in the power-generation market in Ukraine’s highly industrialized eastern regions.

Shadow privatization revival?

The Dniproenergo case, however, isn’t an isolated one.

Earlier this year, a Kyiv court delivered a blow to minority shareholders in Ukraine when it ruled in favor of a large steel mill accused of watering down $60 million in minority stocks last summer. The court ordered investors to retract statements they had made accusing the mill’s majority owners of malfeasance.

Before the controversial June 2006 decision to almost double the mill’s statutory capital, minority shareholders said they had controlled 8 percent of Zaporizhstal’s shares for a total value of approximately $60 million.

The share release increased Zaporizhstal’s statutory capital from $42 million to $131 million by merging the steel mill with five affiliate companies, including steel-trading companies controlled by the mill’s majority shareholders.

During their June 2006 press conference, the minority shareholders claimed that Zaporizhstal had diluted their share capital and thus decreased the value of their stock threefold. Moreover, the minority shareholders said they had not been given a fair option to buy stock from the new issuance.

Legal representatives of Zaporizhstal said none of Zaporizhstal’s shareholders, minority or otherwise, were prevented from attending the June 7 board meeting.

Canada-based Soviet emigre Alex Shnaider, 38, and Ukrainian businessman Eduard Shifrin control Zaporizhstal through British Channel Isles-based Midland Resources.

With capital estimated at $318 million, Shifrin landed 41st in this year’s survey of Ukraine’s 50 richest individuals by Korrespondent, a sister publication of the Kyiv Post.

Companies controlled by Shnaider’s father-in-law, Boris Birshtein, were active in Ukraine during the 90s, trading in steel and other export-oriented commodities.