OREANDA-NEWS. July 19, 2010. INTER RAO’s CEO Boris Kovalchuk announced that INTER RAO will manage the 5 electricity retail companies recently purchased by RusHydro (among them Mosenergosbyt and St. Petersburg retail), reported the press-centre of OTKRITIE Financial Corporation.

Later INTER RAO will swap its own shares with RusHydro in exchange for the retailers. In Fall 2010, INTER RAO will decide on the asset swaps with Gazprom. INTER RAO could potentially acquire the following Gazprom’s non-core assets: an 8.5% stake in INTER RAO, 10.5% in Holding MRSK and RAO ES of East, 5.3% in OGK-5 and TGK-11, 5% in TGK-5, 3.7% in FGC, and a minor stake in TGK-7.

View: RusHydro bought the 5 retail companies in June for USD260m. We calculated a 2% fundamental increase in RusHydro's target price as a result of the deal. The long-term impact on INTER RAO and RusHydro will depend on the valuation of the companies for the asset swap. We estimate a current market cap of Gapzrom’s non-core assets of USD1.6bn, while our target valuation estimate for these stakes is USD2.2bn. This increases the total price tag for the assets that INTER RAO plans to acquire in 1Q11 to USD11bn. INTER RAO will swap its own newly-issued shares in exchange for these assets, though the pricing mechanism has yet to be approved.

Valuation: Inter RAO trades at an EV/Installed capacity multiple of USD168/kW (including OGK-1 and TGK-11) versus the Russian average of USD243/kW.

Action: We view this news as neutral for INTER RAO as it is in line with the company’s strategy. We reaffirm our HOLD rating.