Yesterday, a Latvian internet portal, confirmed that reports circulating on the rumour mill over the last few months are true and E.ON Ruhrgas International has indeed put its shares in Latvijas Gaze up for sale.

Latvijas Gaze is a natural gas transmission, storage and distribution company in Latvia. The privatisation of Latvijas Gaze has been lauded as one of Latvia’s success stories, in particular because of the company’s ability to attract strategic shareholders both from West and from East – namely, E.ON Ruhrgas International (47.2%), Gazprom (34.0%) and Itera (16.0%). With more than 25 million (of the total of 39.9 million) shares being public, the actual trading volumes on the stock exchange have been negligible, amounting to slightly more than EUR 1 million in 2013.

Based on unaudited financial statements for 2013, Latvijas Gaze reported sales of EUR 574 million, earnings before interest, tax, depreciation and amortisation (EBITDA) of EUR 68 million and net profit after tax of EUR 29.5 million. The company has book equity of EUR 609 million, cash reserves of EUR 33.6 million and no interest bearing debt at all.

According to unofficial sources, E.ON has approached the Latvian government offering to sell its shares for c. EUR 200 million. This offer would value the company at EUR 424 million, or at roughly a 14% premium to today’s share price. While the stock market price is hardly representative because of low trading volumes and activity, the E.ON offer still values Latvijas Gaze at above 6 times EBITDA and at above 14 times earnings, or, at 0.7 times book equity and at 0.74 times 2013 sales. For the sake of comparison, shares of Lietuvos Dujos, a similar company in Lithuania, are traded at a price-to-earnings multiple of 15.95 and E.ON own shares – at a multiple of 12.27.

According to the portal, the teaser prepared by Swedbank, the sell-side adviser retained by E.ON Ruhrgas, markets the Latvijas Gaze shares as an attractive investment because of the company’s strong dividend payout track record, expected further increase in demand for natural gas in Latvia and an unlikely market liberalisation before 2017. None of this serves as an economic argument for the state to consider becoming a shareholder again.

On the other hand, the recent geopolitical developments may have changed the game completely. The Baltic energy sector‘s almost complete reliance on Russian suppliers has become one of the key considerations these days. It is almost inconceivable now that Gazprom or Itera would be allowed to increase their share. And Latvijas Gaze’s control over the underground gas storage facility (with an estimated capacity to store up to 3 years’ worth of supply for Latvia) might just become the final factor forcing the Latvian government to step in and buy. This should become clear in the coming weeks. 

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