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Russian 36.6 Pharmacy Worthless Without Veropharm, Analyst Says

OAO Pharmacy Chain 36.6’s Russian retail stores are “practically worth nothing” and the companys only valuable asset is drugmaker OAO Veropharm, according to Otkritie Financial Corp. analyst Victor Dima.

Speculation that Moscow-based 36.6, the nations biggest drug chain, would sell its controlling stake to raise cash has helped Veropharm shares more than double this year. Such a disposal is unlikely, as 36.6 will probably hang on to the business during a bond restructuring, Dima said.

Veropharm is profitable, with sound fundamentals, said Dima, Otkrities senior analyst for retail and drug stocks. Without Veropharm, 36.6 equity is practically worth nothing.

Dima covered 36.6 at Renaissance Capital before moving to Okritie, Russias fifth-largest brokerage, which withdrew its buy rating in February after his arrival. Dima still follows the company and wont give a recommendation on the shares before 36.6 solves its debt problems.

Natalia Kharchevnikova, 36.6s investor-relations manager, declined to comment on Dimas remarks.

36.6 incurred debt to build stores during the 10-year boom that put many branded consumer goods within reach of Russian incomes. The retailer had trouble servicing its debt after the credit crunch spread to Russia, and lost money in 2007 as a new distribution system led to shortages in Moscow. The company had debt of 4.84 billion rubles ($153.5 million) at the end of the first quarter, more than triple its current market value.

Tumbling Shares

The shares have lost more than 75 percent of their value in the past year and closed down 5.3 percent at the equivalent of $5.14 yesterday. The company sold stock at $9 apiece in an initial public offering in January 2003, and 36.6s market value surged during its first four years as a public company, peaking in June 2007 at 20.2 billion rubles, the equivalent of about $641 million today.

36.6, which is named after the Centigrade reading for the optimal body temperature, operated 1,084 outlets in 29 regions at the end of the first quarter.

Its 56.3 percent-owned by 36.6 Investments Ltd., Kharchevnikova said today, declining to disclose that entitys current ownership, while the rest is publicly traded. In July 2007, the company said founders Artem Bektemirov and Sergey Krivosheev had equal stakes in 36.6 Investments.

About 80 percent of the retailers outstanding debt is due this year, Chief Executive Officer Jere Calmes said in May. The company last month sold 2 billion rubles of bonds to help restructure debt, and has proposed staggering repayment of a previous bond issue to preserve funds.

The restructurings negotiation process is ongoing, 36.6s Kharchevnikova said in an e-mailed response to questions. We are currently finalizing the legal documentation. Managers continue to negotiate with creditors and vendors, while working with the board to solve the companys financial needs.

Bondholders are more likely to agree to an amended restructuring plan proposed by 36.6, rather than push the company into bankruptcy, given their debts arent secured and they would be unlikely to recover any cash, Dima said.


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