“No confidence to underlie actions on such a large scale”

25-10-2019

Alexander Shevchuk, Executive Director, Association of Institutional Investors (API)

Газета "Коммерсантъ" от 25.10.2019


		
– Which is more profitable for shareholders, privatization of regional IDGCs or their consolidation 
by ROSSETI?
– The current Russian power grid development strategy envisaged possible partial privatization of 
inter-regional 
distribution grid companies (IDGCs) involving, among others, international companies with success 
stores. 
Pilot privatization of several IDGCs is the most attractive option for both shareholders, including 
the Russian Government, and consumers. However, the management team of ROSSETI still lacks incentives 
for implementing this approach such as 3-year option plans for the IDGCs, ROSSETI and FGC UEC 
assuming a KPI correlated with the growth of each company’s total shareholder income. For lack
 of such incentives, the management is actually motivated to consolidate assets under management 
rather than pursue the adopted development strategy, even if no-one wins. Let’s take one case for 
example. In the period from 2012 to 2018, the capital investments of ROSSETI’s IDGCs (excluding FGC UEC)
 exceeded 950 billion rubles. Despite growing electricity rates, an almost 45% increase in revenue 
from electricity transmission services (by 240 billion rubles) and 271 billion rubles added to 
leverage, the consolidated EBITDA earned by the holding (excluding FGC and earnings from connection 
to the power grid) increased by a mere 51 billion rubles, an obvious evidence of underperforming capital
investments (ROIC being less than 4%).
 
– Could you remind us of any previous cases of consolidating major state-owned holdings in Russia?
– For instance, Svyazinvest Group was restructured as part of the consolidation driven by Rostelecom, 
with questionable benefits. Interregional communication companies were merged into Rostelecom. As a result, 
most of the minority shareholders were squeezed out during the mandatory buyback procedures; from April 2011 
to October 2019, the company’s value decreased by about 57% whereas the Moscow Exchange index grew by 61%
 for the same period. The company’s business efficiency is permanently stagnating, with OIBDA margins 
steadily in decline in the past five years, from 34.3% in 2014 to 31.51% in 2018. In fact, the company 
has become much less market-conscious, now focusing on projects implemented by or related to the 
Government of Russia.
 
– Would minority shareholders prefer selling their stakes if offered a buyback or having them converted 
into the parent company’s shares in a massive follow-on offering?
– In a consolidation scenario, ROSSETI can offer both strategic and portfolio investors only minor stakes 
in the merged company, much below a blocking interest, not backed by strong past performance and laden with 
extra distressed assets. The only possible effect all minority shareholders could theoretically benefit 
from is an increase in liquidity, but this can only work out if the market cap goes up. However, given 
some of the top managers’ statements of this business being unable to generate positive free cash flows, 
the merged company’s prospects cannot be estimated in a positive way.
 
– What is the right approach to valuation for the repurchase of minority stakes?
– The valuation for repurchase and conversion purposes should be approached in the same way as regards 
methods. Given heavy volatility and low liquidity of all shares of both ROSSETI and the IDGCs, the 
comparison of stock prices would not reflect the actual fair value. The income-based approach to valuation 
using DCF models requires full-fledged cooperation with all interested minority shareholders in 
methodological efforts when identifying the necessary input data, forecasting revenues, investments, 
operating expenses, and tariffs. For more than a year, we have been proposing to form a dedicated committee 
bringing together representatives of the principal minority shareholders, but no real progress has so far
been seen in this direction, despite the CEO’s promise at the shareholders meeting of ROSSETI in 2019. I mean, unlike 
Svyazinvest, ROSSETI even does not have a venue for steady interaction with the principal shareholders, hence no confidence 
to underlie corporate actions on such a large scale, the confidence it cannot hope to win in a couple of months.
 
Interview by: Tatiana Dyatel



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