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Sokrat Flash Note: OJSC Enakievo ISW sells stake in Metalen

April 29, 2009

In 1Q09, OJSC Enakievo ISW sold its 37.04% stake in JV Metalen LLC to Metinvest Holding LLC. The price is unknown; our estimate is USD 55-65 mln. Our interpretation: Metinvest Holding provided OJSC Enakievo ISW with liquidity, to be used in particular for the construction of Blast Furnace No. 3. Metinvest benefited from that deal by effectively increasing its share in the Enakievo ISW group, because OJSC Enakievo ISW will now have to issue 9.07 mln new shares in order to acquire all rights in Metalen (previously, we expected the issuance of 5.71 mln new shares). We also do not rule out additional share issuances aimed at financing BF No. 3’s construction.

Executive Summary

    Metalen’s 1Q09 report: new ownership structure. Metalen’s new statute, registered on February 05, 2009, shows two owners: Metinvest B.V. (62.96%) and Metinvest Holding LLC (37.04%). As of the end of 2008, the 37.04% stake belonged to OJSC Enakievo ISW and was valued at USD 57.7 mln. This stake, obviously, has been sold recently.

    Metalen’s 1Q09 report: dividends. On March 06, 2009, Metalen’s members (by then, supposedly, Metinvest B.V. and Metinvest Holding LLC) decided to declare substantial dividends (estimate: USD 180 mln). The estimate of the dividends for the 37.04% stake, which OJSC Enakievo ISW used to own: USD 66 mln.

    The 37.04% stake deal: price estimate. Based on the balance sheet value and the dividends declared, we estimate that OJSC Enakievo ISW could be able to fetch USD 55-65 mln (UAH 420-500 mln) for the stake it sold.

    The 37.04% stake deal: benefit for OJSC Enakievo ISW. Waiting for Metalen’s dividends may take a long time. The money paid by Metinvest Holding LLC for the stake in Metalen would allow OJSC Enakievo ISW to finance various purposes, including the construction of Blast Furnace No. 3 (estimated remaining CapEx needs: USD 200 mln), which is scheduled to be completed within a year.

    The 37.04% stake deal: benefit for Metinvest Group. If and when OJSC Enakievo ISW acquires JV Metalen LLC (thus formally forming the Enakievo ISW group as one company) by issuing 9.07 mln new shares, all of them will go to various Metinvest Group companies. Previously, we counted on 3.36 mln new shares (to pay for the 37.04% stake) remaining in SC Enakievo ISW’s treasury and eventually being cancelled.

    The 37.04% stake deal: effect on minority shareholders. We previously warned that the construction of BF No. 3 could be a heavy burden on all Enakievo ISW group shareholders: USD 50-100 mln of fresh shareholder capital may be needed, to be funded with 25-50 mln new shares, which will dilute the current shareholders by 2-4 times. The liquidity from the deal in question may decrease the need for a capital call, which is POSITIVE. Nevertheless, following the deal with the 37.04% stake, it is now almost certain that the acquisition of Metalen will result in a greater decrease of free float (from 9.5% to 4%, not to 5% as estimated earlier). Furthermore, we do not exclude the possibility of a smaller share issuance (up to 20 mln new shares) purely for CapEx funding purposes.

Report prepared by Dmitry Khoroshun, Senior Equity Analyst, Investment Group Sokrat
( tel. +38 (044) 207 01 00).

Press Service of the ‘Sokrat’ investment group
Tel/Fax: +38 044 207 01 00

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