DTEK purchases 45% of Krymenergo, takes 45% of power distribution market

DTEK (DTEKUA) was named the winner of a privatization auction for 45% in Krymenergo (KREN UK) that took place last week. DTEK out bid LEO, its only competitor at the auction, offering UAH 256 mln (USD 32 mln) for the stake. The deal-implied price for Krymenergo was UAH 3.3/share or 65% above the market price. If the deal is closed, DTEK would control 57.5% of Krymenergo.

Share of main players on power distribution market*
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                       Nov-11  May-12
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DTEK                  10%     45%
State                  58%     19%
VS Energy           11%     13%
Energy Standard  11%     13%
Other private       10%     10%
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* In terms of power distributed in 2011
Source: Concorde Capital

Multiples summary for 2012 Oblenergo privatization tenders (based on 2011 financials)
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Company               Buyer               Impl.MCap,$mln  EV/EBITDA  EV/EBITDA adj.*    P/E
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Krymenergo            DTEK                     71.1        8.4               15.1   17.1
Dniprooblenergo       DTEK                    165.0       4.2              6.3   30.5
Dontestkoblenergo     DTEK                   145.9       5.6             15.7  >1000
Chernivtsioblenergo   VS Energy             44.1        4.7              7.4    9.4
Zakarpataoblenergo    VS Energy            35.2        5.3              7.3   62.5
Vinnitsyaoblenergo    Energy Standard    19.4        3.7              5.8   10.1
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* With net debt adjusted for outstanding debt to Energorynok

Alexander Paraschiy: While there was no surprise about the name of the auction’s winner, we note the deal price was pretty high: implied 2011 EV/EBITDA is 8.4x vs. multiples for similar 2012 deals of 3.7x-5.6x. Krymenergo is DTEK’s fifth acquisition in the Ukrainian power distribution sector in the last six months. With these transactions, DTEK increased its share in the domestic power distribution sector to 45%, from just 10% half a year ago, and strengthened its position as the largest holding for power distribution companies in Ukraine. With closure of this deal, DTEK is nearly finished with expansion into the Ukrainian electricity sector, in our view, with perhaps Zaporizhyaoblenergo (ZAON UK) and/or Kharkivoblenergo (HAON UK) also potential targets. While the company paid just USD 230 for the five acquisitions, it also incurred almost USD 900 mln in the distributors’ debt to the wholesale energy market operator. The deals therefore cannot be considered value-accretive for DTEK right now, but we expect the purchased assets will unveil value after implementation of tariff reform in the distribution sector, which DTEK is now very likely to lobby for even more intensively.