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ATON - INTEGRA - Life After the Spinoff - Oct 10, 2012.

Integra has released the details of the spinoff of its 36% stake in IGSS, which will be distributed to the company's shareholders via dividends in-specie:

19 Oct - record date for dividends in-specie

9 Nov - certification date

Second half of November - IGSS to be listed on LSE

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Life after the spinoff. We expect the price of Integra's GDRs to fall on the first trading day after the record date as the market will extract the value of the 36% IGSS stake from the company's value. There are no official estimates of IGSS's target value, so it is difficult to determine how far Integra's GDRs may decline. This is currently the key risk to Integra's valuation, in our view. In the table below we present scenarios for Integra's price decline depending on the market's valuation of IGSS.

Irrational valuation. On its 1H12 balance sheet Integra treated its 36% stake in IGSS as an investment held for distribution to owners. The company estimated the value of the stake at $210mn, which translates into $585mn for the whole company. We note that Integra's market capitalisation on 9 Oct was only $233mn, which implies that the value of its residual businesses (the drilling, IPM, WO and technology services segments) is only $23mn. We believe that neither of these valuations - on Integra's core businesses and its 36% stake in IGSS - make rational sense.

Our valuation of IGSS. On 7 Sep we downgraded Integra's target price by 37% to $2.72/GDR mostly due to our revision of the company's margins forecast (for more details see our report Oilfield Services: Industry Develops Unevenly). We derived our target price via a sum-of-the parts model which valued Integra's core businesses at $1.57/GDR and the 36% stake in IGSS at $1.14/GDR. Our valuation of IGSS implies a fair value for the company of $592mn, which is very close to the estimate on Integra's balance sheet ($585mn).

Major risk: We could see a decline in IGSS's GDR price after the spinoff because many investors may want to take profits and convert their dividends in-specie into dividends in cash. Furthermore, Integra will start selling the IGSS GDRs of shareholders who fail to submit the required documents by the deadline (9 Nov) in order to provide them with cash compensation.

Spinoff Procedures

On the record date of 19 Oct, Integra's GDR holders will receive a certificate (the aCertificate Forma) which will give them the rights to IGSS's GDRs. Under the terms of the spinoff, each Integra GDR holder will receive 0.02 IGSS GDRs (0.823 shares of IGSS for every class A share of Integra). To obtain IGSS GDRs, certificate holders must submit the Certificate Form to Integra Group by 9 Nov (the certification date).

Certificate holders will have two options:

- Submit the certificate to Integra by 9 Nov and receive the IGSS GDRs on the day of or the business day following their listing on the LSE

- Do nothing and receive proportional net proceeds from a future cash-out (see below)

The latter option is very risky in our view, because Integra has not guaranteed the timing or the amount of the cash distribution. The GDRs of shareholders who do not submit their certificates on time will be sold later on the market (the cash-out). The number of shares to be cashed out is naturally uncertain, as are the market price and the liquidity of IGSS's GDRs. We therefore believe that submitting the certificate on time is the best option for minority shareholders.

Irrational Valuation Presents Investment Opportunity

The key question for the upcoming spinoff is the extent of Integra's share price decline on 22 Oct - the first trading day after the record date (Friday, 19 Oct). Integra estimates the value of its 36% stake in IGSS at $210mn, implying that Integra's shares should decline to $0.12/GDR. That would take Integra's market capitalisation after the spinoff to $22mn, which we believe is nonsensical for a company offering 2012E revenue of $655mn and EBITDA of $34mn.

Our estimate of IGSS's fair value ($592mn) is close to Integra's ($585mn). Therefore, we believe that the market currently underestimates either the value of IGSS or the residual value of Integra after the spinoff. Aton's target price for Integra, which consists of $1.58/GDR for its core business and $1.14/GDR for the 36% stake in IGSS, implies that the market underestimates both values.

We believe that purchasing Integra's GDRs ahead of the record date offers a good opportunity to benefit from the market's apparent lack of information on IGSS's real value.

Downside Risks are Limited

We argue that the current price of Integra's GDRs does not reflect the fair value of the company's core businesses and IGSS. We conducted a stress test in order to check our thesis, which was based on the following assumptions:

- We assume that the current price of Integra's GDRs is fair

- We employed the proportions used in our sum-of-the-parts model to determine the shares of Integra's core businesses' value and IGSS's value in the current price

Our assumptions imply that the current price consists of $0.73 from Integra's core businesses and $0.52 from IGSS. We used these numbers to calculate EV/EBITDA valuation ratios for both companies after the spinoff and compared them with Integra's current ratios.

Our analysis shows that the spinoff provides shareholders with the stocks of two companies which have lower ratios than the united company. We believe the discount to the ratios of international peers also supports this view.

Technical Risks

We might see a decline in IGSS's GDRs after the spinoff because many investors may want to take profits and convert their dividends in-specie into cash. Furthermore, the risk of additional selling pressure exists due to the potential cash-out if some of Integra's shareholders fail to submit their certificates by the deadline. Uncertainty over IGSS's liquidity after the listing presents an additional risk to minority shareholders, in our view.


Copyright: Aton OOO (LLC), All rights reserved.

For further Information please contact: Aton OOO (LLC),

27 Pokrovka str., bld.6, 105062 Moscow, Russia

phone: (495) 777-66-77, (495) 228-38-99,
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Publication:Russian Banks and Brokers Reports
Date:Oct 10, 2012
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