OREANDA-NEWS. October 19, 2010. Norilsk Nickel may swap 82.7% in OGK-3 for a 10%-15% stake in INTER RAO, Vedomosti reported. According to the report, Norilsk Nickel CEO Vladimir Strzhalkovsky discussed this deal with INTER RAO Board Chair Igor Sechin this summer, reported the press-centre of OTKRITIE Financial Corporation.

Norilsk’s stake in OGK-3 was valued at USD 2.1bn for the deal, and it will not be able to sell its new stake in INTER RAO for a year after the deal. The BoD of Norilsk Nickel will consider the deal on 21 October, before the EGM during which a new BoD will be elected.

View: The USD 2.1bn price is lower than the figure mentioned by Vladimir Potanin in an interview last week (USD 2.5-3.0bn), and less than the current market price of this stake. Norilsk will receive shares of INTER RAO, which means it will continue to own a non-core asset, at least for 1 year (it will not be allowed to sell this stake for a year). In terms of multiples, Norilsk’s 2011E EV/EBIDA would increase from 4.8x to 5.0x. On the positive side, Norilsk Nickel will get a stake in a more liquid company, and potentially it would be easier to sell this stake in the future. That said, overall we view this news as negative for Norilsk at this stage.

Valuation for OGK-3 implies a price of USD 2.5bn for the whole company, which is 6% below the current market price. We find the news positive for INTER RAO because the company could receive a controlling stake in OGK-3 with a discount to the market price, and because this acquisition will push INTER RAO’s total installed capacity above 26GW. The latter development would make it the largest generation company in Russia, which is in line with INTER RAO’s strategic vision. We find the news neutral for OGK-3 at this point, as the company’s minority shareholders are unlikely to participate in the potential buyout offer.

Valuation and Action: We reiterate our BUY rating for Norilsk Nickel and a target price of \\$220/share. Norilsk Nickel trades on a 2011E EV/EBITDA of 4.8X, versus 6.7x for its peers.

We find the news positive for INTER RAO in the short run, however there is still uncertainty regarding the pricing of INTER RAO’s shares during the additional share issue and a dilution risk, hence we keep our long-term HOLD rating. Neutral for OGK-3. INTER RAO trades at USD 189/kW and OGK-3 at USD 127/kW vs. the USD 261/kW Russian generation average.