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RWE pullout from TGK-2 deal

Germany's second-largest utility, RWE AG, won't buy a stake in Russian power generator OAO TGK-2

Germany's second-largest utility, RWE AG, won't buy a stake in Russian power generator OAO TGK-2 because the price is too high and the transaction would suffer from “high uncertainty'' on stock markets.

RWE commented that the Russian market still remains “attractive'' and the firm are in talks with other acquisition targets in the country.

The TGK-2 deal was part of RWE's expansion plan to develop abroad, particularly in eastern Europe and Russia by investing about $43.2bn over the next five years. The company had been hoping to follow in the footsteps of fellow energy giant Eon, which last year acquired a controlling stake in Russian electricity supplier OGK-4.

RWE aims to boost its share of foreign-earned profits to as much as 50 per cent by 2012, from 36 per cent currently.

Based in the north- west of Russia, TGK-2 owns 16 combined heat and power plants with an electricity capacity of 2,600MW, and would have given RWE access to 7m new customers.

However, the TGK-2 deal, has been hindered by reports of difficulties with RWE's partner, Russian conglomerate Sintez. UES, a former-state holding company, in March said RWE wanted to buy a controlling stake in the power company for about Rbs19bn ($749m) as part of government efforts to liberalize the Russian energy industry. UES eventually sold a majority stake in TGK-2 to Sintez.

The two companies planned to pool the shares in joint venture, with RWE taking a 51 cent stake.

The structural risks posed by Gazprom's monopoly over supplies, its increasing participation in electricity generation, and possible delays in electricity price liberalization all present major risks for foreign energy conglomerates hoping to enter the market.

RWE's decision was also influenced by the collapse of Russian investor confidence in recent months.

Nearly $800bn has been wiped off the value of stocks traded on Russian bourses as a combination of the credit squeeze, political interference and the Georgian crisis sent foreign investors packing.

Although Russian stock soared nearly 30 per cent yesterday as a government rescue plan to boost liquidity revived investor confidence the market turbulence remains a key source of concern for foreign buyers.