OREANDA-NEWS. February 04, 2010. Russian Minister of Transportion Levitin and PM Putin agreed to transfer controlling stakes in 6 second-tier Russian airlines from Rostekhnologii to Aeroflot. As a result, Rostekhnologii will receive a 10% - 26% stake in Aeroflot, reported the press-centre of OTKRITIE Financial Corporation.

View: This decision is primarily driven by the weak performance of these airlines, which have a high leverage and are loss-generating. Rostekhnologii previously intended to create another big airline out of these assets, which would potentially have become a competitor to Aeroflot. However, these plans could not be realized.   We think that the benefits to Aeroflot from such a deal are unclear.

The company is in the process of fleet renewal and cost optimization, and is about to stop receiving royalties paid by foreign airlines. Without these payments Aeroflot's margin will be very thin (if not negative) and the company will face difficulties with revamping its existing fleet and helping the newly-acquired airlines to survive. Thus, the potential increase in domestic market share will likely be offset by these factors. Moreover, the final decision has not yet been approved by the Aeroflot's shareholders, who could in fact reject the deal.

Valuation and Action: We like Aeroflot as a stand-alone company and have a BUY rating for the stock. However, should the deal be finalized, it would likely necessitate changes in our financial forecasts.