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The "electrocuted" shareholders of ESO: The Real Return of long-term investors

Updated: Dec 16, 2019

Usually, when one hears about Corporate Governance problems on the Baltic stock market, the first thing that comes to mind is that yet again some Latvian company is misbehaving. This time, however, Lithuanian companies Energijos Skirstymo Operatorius (ESO), power and gas distribution company, and Ignitis gamyba, electricity generation company, are in the center of attention: Lithuanian state as the major shareholder plans on delisting them and make a buyout, but the way how this intention is communicated appears to be troublesome. It is worth looking into how the market reacted to these announcements.


On November 11th State-owned Ignitis Group, a major shareholder of ESO’s and Ignitis gamyba, makes an announcement that it intends to delist both companies because: ‘’Stocks of both companies are illiquid.’’

That’s very true as their monthly turnovers are very low, but what one could expect if the State released for free-float just 5.02% and 3.18% of shares respectively.


‘’Being on the stock exchange does not provide any real benefit and is a source of additional costs as companies do not plan to raise additional capital.’’


‘’Parent company Ignitis Group is analyzing long-term financing opportunities, which could include raising debt and equity but no specific decision has been made.’’


According to Lithuanian Law, the buyout share price should be determined on the basis of the average stock price for the last 6 months. Ignitis Group (State of Lithuania) was generous and used 24 months average stock price to smoothen out share performance since the beginning of trading so that the negative impact of the stock price drop in 2018 is minimized. So, the bid is set at 0.788 EUR per ESO’s share.

The stock performance of Energijos Skirstymo Operatorius since the first day of listing till 11.11.2019 (the day before the delisting announcement), Source: Alphniox, Refinitiv


On November 13th the stock resumed trading and quickly advanced to bid’s price of 0.788 EUR.

Energijos Skirstymo Operatorius stock price performance from stock’s first trading day till 19.11.2019 , Source: Alphinox, Refinitiv


Now, this is where things get ugly, as minority shareholders are not agreeing to the proposed bid price 0.788 EUR, arguing it is undervalued as the price was set below the price of first trading day 0.885 EUR. It means that investors, who held the stock since its first trading day, will lose ~11%. However, according to the D. Maikštėnas (Ignitis Group’s CEO) interview [1], if one takes into account also paid dividends, then investors, in fact, have earned 5% over this holding period. We double-checked this claim and calculated a total return of 10.65% (as of 19.11.2019) from holding ESO’s stock since its first trading day. One should never forget to include dividends in calculating total return rather than calculate pure price performance.

Energijos Skirstymo Operatorius Total Return (dividends reinvested, dividend tax, inflation not deducted), Source: Alphinox, Refinitiv


This is not the end of the story yet, as, when calculating stock’s real total return, one should also consider the dividend tax (which, by the way, fills in the State budget) and his worst enemy – inflation. Dividend tax in Lithuania is 15%, while annual inflation in Lithuania is depicted in the table below:

*Annual inflation for the year 2019 was taken from Swedbank Lithuania macro forecast.

Source: Lietuvos statistika [2], Swedbank Lietuva [3]


Now, if we include these components into real return calculation, the resulting performance is as follows:

Energijos Skirstymo Operatorius Real Return (Dividends reinvested, dividend tax, inflation included), Source: Alphinox, Refinitiv, Lietuvos statistika, Nasdaq Baltic

We can see that dividend tax and inflation is quite costly for investor and has taken its toll in performance, reducing investor’s profit to minuscule 0.09% for the entire holding period. Knowing this, we can assume that investment in ESO’s stock has not been the most profitable for its minority shareholders on the Baltic stock market.


In the end, we would also like to mention that good corporate governance practice implies that the Board of Directors is working in the interest of all shareholders to increase the long-term value of the company and needs to come out with their independent opinion on important events and decisions. Unfortunately, till now no such opinion was not expressed. The statement was made only by the majority shareholder (Ignitis Group) belonging to the State of Lithuania.


[1] https://www.vz.lt/pramone/energetika/2019/11/19/d-maikstenas-laukiame-investuotoju-argumentacijos-del-saziningos-kainos

[2] https://osp.stat.gov.lt/en/pagrindiniai-salies-rodikliai

[3] https://en.delfi.lt/business/analysts-lithuania-is-expected-to-post-strongest-gdp-growth-in-baltics.d?id=82724703


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