Dubai World pull out of $5.3b deal with OGK-1

Poor market conditions have led the Dubai government's sovereign wealth fund, Dubai World, to pull out of a $5.3 billion deal to buy control of Russia’s biggest wholesale power producer, OGK-1.

The purchase deal Dubai World had almost finalised along with its Russian partner, energy trader Roskommunenergo, was for a price equivalent to $516 per kilowatt of installed capacity.

When asked about the progress of the deal in July, OGK-1 general director Vladimir Khlebnikov said that Dubai World's commitment was "conditional" and that the company was in talks with another potential buyer who had shown "very serious interest".

OGK-1 spokeswoman Yana Dubeikovskaya said on Monday that the company was waiting for word from Dubai World.

Power prices in Russia have been kept artificially low by the government as they have risen elsewhere in the world. Russia is now deregulating electricity prices incrementally to help companies fund expansion and will free prices completely in 2011. The country needs as much as $185 billion to modernise and expand power plants and infrastructure through 2011, according to Chief Executive Officer of Unified Energy Anatoly Chubais. Power demand in Russia has been projected to increase about 5 per cent a year through 2012 and 70 per cent by 2020. The country’s $1.4 trillion economy has enjoyed average annual economic growth of more than 7 per cent since 2000.

Russia's energy minister said on Monday that it does not make business sense for the government to sell its electricity assets right now, because their market values have fallen so low. OGK-1 is indirectly controlled by the government.

"The situation on the market today allows us to pause, take a breath and look at where we can go from here," minister Sergei Shmatko told reports in response to questions about stake sales.

Under the preliminary agreement, Roskommunenergo offered 2.6 roubles per OGK-1 share, or $516 per kilowatt of the company's power generating capacity. At that price, the deal was worth $5.3 billion.

But the firm's market value has since fallen more than 70 percent below the offer price.

At 1350 GMT on Monday, its stock stood at 0.720 roubles per share on the MICEX exchange.

Dubai has until Oct. 1 to perform due diligence on OGK-1, set the final structure of its relationship with Roskommunenergo and decide if it will go forward with the acquisition.

Dubai World would be the second foreign investor in the electricity sector to scrap investment plans after the recent turmoil in Russia's financial markets.

German utility RWE on Friday said it would not to go ahead with a deal to buy control of regional power producer TGK-2, citing market conditions.

Russian and foreign direct investment in the country’s generating companies’ assets reached $40 billion over the past 18 months. “A detailed investment programme has been drafted as a suitable response to the growing electricity demand for 2008-2012. Under the document, $183 billion will be invested in the sector’s development, including $76.6 billion in the construction of power plants with a total capacity of 43,000 MW,” Chubais said.

Author: Jo Amey