OREANDA-NEWS. August 4, 2011. Power Machines announced that Siemens will sell its 25% stake in the company to Highstat Ltd, a structure owned by Alexei Mordashov who ultimately controls Power Machines. The price of the stake was not disclosed. Additionally, Siemens and Power Machines are reportedly planning to set up a JV to produce high-output gas turbines that would be 65% controlled by Siemens, and 35% by Power Machines.

Consequences

A voluntary buyout offer is now possible: once the deal is completed, Highstat Ltd will control 95.3% (70.3% + 25.0%) of Power Machines’ capital. According to Russian law, any party that consolidates 75% of a company’s capital must organise a voluntary buyout of minorities.

The voluntary buyout price is the higher of the weighted average share price for the previous six months or the price paid when 75% of the shares were consolidated. According to Bloomberg the weighted average price of Power Machines is RUB9.58/share or 17% higher than the current price (RUB8.17).

The controlling shareholder also has the right to organise a squeeze-out of minorities within six months of the voluntary buyout if he controls more than 95% of the company’s capital. The squeeze-out price is the acquisition price or the preceding voluntary buyout price, whichever is higher.

From a fundamental point of view, Siemens' departure from the shareholding structure is neutral for Power Machines, as Siemens played almost no part in its management.

Investor Scenario Analysis: What to Do

Scenario 1: Do not participate in voluntary buyout (assuming no squeeze-out)

In this scenario we, the investor, elect not to participate in the voluntary buy-out on the basis of the following. Our view is that the company will not be fundamentally affected while the likelihood of a dividend policy establishment rises with the exclusion of a large shareholder (Siemens). On the other hand, there is the risk that we are left with highly illiquid shares and the possibility of deteriorating transparency and corporate governance with the large foreign investor no longer influencing the company. Aton’s view is that this is a risky scenario given that the dividend establishment theory is purely speculative.

Scenario 2: Sell shares at voluntary buyout

Currently the weighted average price of Power Machines is RUB9.58/share or 17% higher than the current price (RUB8.17). However we note that before the deal can proceed, FAS approval is required. This may be a protracted process (see below), and given the downward share price trend recorded in the past 6M, the actual buyout price may be lower than the current estimate. Aton believes this is the most reasonable choice: while the investor may receive a slightly less desirable price, if the voluntary buyout offer is declined and Mordashov chooses not to squeeze-out minorities, the investor may ultimately be left with the circumstances described in scenario 1, which we regard as unfavourable.

Scenario 3: Buy share now to sell at voluntary buyout

In this scenario we buy now and sell at the voluntary buyout. Aton sees two risks here. The first, the less feasible, is that the FAS rejects the deal. In this case no buyout will be offered, and the share price is likely to decrease after a speculative rise. The second risk is that the period between the buy-out’s initiation and its pronouncement may be protracted. By law, the acquirer has one month after the acquisition to make an offer, and we also need to factor in the time the FAS requires to approve the acquisition (up to one month with further delays still possible). Additionally the buyout’s timing may be protracted due to another legal requirement, that of the acquirer obtaining a bank guarantee. As such the voluntary buy-out offer may take place at best two months after the buyout is announced, and taking into account the downward pricing trend the actual buy-out price may be lower than our current estimate. Aton treats this scenario as highly risky, and offering limited upside potential.