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Aeroflot Plans 10% Sale to Establish Value for Privatization

OAO Aeroflot aims to sell as much as 10 percent of its stock next year in a push to boost the volume traded on the Moscow exchange and establish a value for Russia’s largest airline ahead of a planned privatization.

Aeroflot could sell treasury shares and others owned by state holding company Rostec, Chief Executive Officer Vitaly Savelyev said in an interview. It may also issue new stock, diluting the government stake to 50 percent plus one share from 51.17 percent. The disposal will lift the proportion of publicly traded stock to as much as 16 percent from 4 to 6 percent.

“The final decision will depend on the Federal Property Management Agency, but we have reached a preliminary agreement with all the participants involved,” Savelyev said in Moscow. “We believe that in order to determine the fair stock price we need to have at least 15 to 20 percent in the free float.”

Aeroflot shares pared losses in Moscow trading today.

Plans for Russia’s biggest wave of asset sales since the 1990s have stuttered amid market volatility and requests from companies including pipeline operator OAO Transneft to retain state support. Savelyev, who has previously urged the government to delay selling Aeroflot, said a plan to dispose of about half the direct state stake has been postponed until 2016.

Liquidity Gain

Aeroflot shares are about 40 percent undervalued, Savelyev said in the interview yesterday. The stock has added 40 percent this year, giving the company a market value of 69.6 billion rubles ($2.1 billion). International Consolidated Airlines Group SA, parent of British Airways and Europe’s most valuable airline, is worth the equivalent of $12.2 billion.

The shares fell 0.5 percent after earlier losses of as much as 3.8 percent to close at 62.65 rubles on the Micex Index.

“The fundamental point is that the stake should be sold in the market to increase liquidity and, accordingly, the company’s capitalization,” Chief Financial Officer Shamil Kurmashov said in the interview after Aeroflot posted a higher-than-expected 88 percent jump in third-quarter net income.

Aeroflot also plans to complete the consolidation of its regional operations, establish a discount unit, Dobrolet, in the second half of 2014 with Boeing Co. 737-800 planes, and build a Far Eastern carrier to be known as Aurora, Savelyev confirmed.

“By creating all the necessary conditions for a budget airline in Russia, we will be not only able to provide a low-cost alternative for our passengers, but also significantly boost our market capitalization,” said Savelyev, whose five-year contract as CEO was renewed last month.

Legal Changes

The discount unit could help increase Aeroflot’s value by $1.5 billion to $2 billion in three years, he said, citing analyst estimates. Aeroflot said in October it would spend $100 million on Dobrolet, which plans to discount fares 40 percent.

Following legal changes, Dobrolet will have the right to sell non-refundable tickets, charge for meals and employ foreign pilots. Within five years it should be carrying as many as 10 million passengers annually, Savelyev said. Previous low-cost projects in Russia failed because of legislative restrictions and a failure to cut all possible costs, he said.

While growth in Russia’s air-transport market will probably slow to 10 to 12 percent in 2014, Aeroflot anticipates a 15 to 17 percent gain as it improves service standards, Savelyev said.

The group expects to lift passenger numbers as much as 17 percent this year, with sales reaching at least $9 billion and earnings before interest, tax, depreciation and amortization at least matching the 2012 figure as a percentage of revenue, CFO Kurmashov added.

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