Equity Financing in Russia

This is an archive of my Blog from 2007. The posts are presented in format as they were published.

Monday, April 14, 2014

Happy hello from a toddler


 Well, it has been only two months of my blog existence, and is evolves on.

First, I want to make clear several things:
WHY. Over the last five years I have met a number of businessmen, presumably form investor banking community in the USA that were absolutely unaware of what is currently going on with investment business in Russia. They asked a lot of questions, some of them were really na├»ve. At that time I became “pregnant” with the idea of producing a newsletter on the subject. I did, though we never advertized it, but surprisingly enough, we got some feedback. With the advent of blogosphere - that idea materialized due to excellent opportunity that Google provides. I guess that these two Google Russian geniuses put a substantial effort to changing of the world. Financial and stock market blogs are certainly becoming a widely read alternative source of business news and opinion. I guess, I may add something to it.

WHAT. So, I am writing my personal views (ref: Disclaimer) on what is going on here in Russia. I do not pretend to provide a comprehensive overview of investment events in the country, rather make some comments on the situations and happenings that attracted my attention.

WHO. I am not hiding behind anonymous fancy names and anyone who wants to contact me may do this freely using provided coordinates. One of the mysterious anti-Russian blog, hiding its real name, calls me March 17 as “a Russian stock broker trying to tout the wonders of investing in the Russian market”. I am not touting at all (I guess, I need to put in an investment banking disclaimer type note – the one that is extremely professional at GS web-site: “GS expressly disclaims any implied warranty of merchantability or fitness for a particular purpose, including any warranty for the use or the results of the use of the services with respect to their correctness, quality, accuracy, completeness, reliability, performance, timeliness, or continued availability”. That is 100% for me. I am not either Russophobe or Russophile, and I do not want to be engaged in any political discussions (though I do understand the sacred notion of Communist theory: “Politics is the concentrated expression of economy”)

TARGET. So, my target audience is the investment banking professionals that might be interested in what is going on here.

POLICY. I have absolutely no objection of usage of my posts anywhere (unless I shall change my mind sometime in the future). I do not get a penny from no one for this blog posts, nor am I dreaming to be cited in the financial press.

HAPPENINGS. Although I do not want to be involved in any political games, I was amused to read the verbal “battle” of La Russophobe with the Russia Blog. I have no idea why they decided to involve me, I have no idea what is the purpose of it, but one thing I like of the Russia Blog – it has the names and addresses of real people, while the other opponent is hiding behind Internet anonymity.

Due to the excellent service of StatCounter I have a very good opportunity to track who is visiting my blog and from where. I do not boast to be “a popular source”, but each month sees twofold increase of visitors. And I am happy and content that:
- Visitors mostly come from the USA and UK, however there were some exotic parts of the world too
- For the last two days the hits came from the offices of Google Inc, NYSE, Citicorp, Salomon Brothers, Goldman Sachs, PwC, E&Y, Parex Bank, Mellon Bank, Troika Dialog Uk Ltd. and many others.
- Each week I notice the increase of returning visitors.

What next???

Russian IPOs - Review of 11th Week of 2007


Russian Stock Market - IPOs
Recent world stock market events lead to more discussions on the Russian stock markets and IPOs in the Russian press. Agency of Political News in a lengthy commentary on March 9 argues that the stock market in its classic definition does exist in Russia. The author notes that basically there are no private investors – in 2005-06 they counted only 3% of the equities of Russian issuers. Thus there is no actual money from population in the stock market.

NOTE. Just for information, here is the data on the growth of transactions on MICEX:

Private individuals ARE there

Furthermore, the commentary cites well-known numbers that 95% of all market turnovers are made by 10 top leading companies. Well, remembering Mark Twain (There are lies, damned lies and statistics), and the fact that we may use this any way we like, I guess there is truth in everything. However, I think that the commentary is extremely sly regarding IPOs. Citing the statistics on Russian IPOs it states the reasons why Russian IPOs are prevailing in the West, not domestically:

(a) While listing outside the country it is very convenient to hide the volumes and money raised and do not attract attention. Every professional knows that this is not true.
(b) There are insufficient resources on the Russian stock market and the investors are reluctant to disclose that they have money. Maybe partially it is true, but it is well known reality that here in Russia we DO have money, but the question is universal – where are the quality products? Just an illustration – what about 2006 results of domestic IPOs - $ 459 M for Raspadskaya, and $ 368 M for Magnit. This is a bit controversial issue. Market Watch in its report on March 9 quotes Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow. "Basically, there's not enough money. There are around 1,200 banks in Russia and most of them are very small. That makes it almost impossible for them to lend billions of dollars."
(c) It is very handy to sell the Russian company via its foreign “daughter”, and the money this way is grounded in a handy location much quicker. Once again, it is half true. According to RTS data in 2006 there were 16 domestic IPOs in Russia, as to foreign - 8 IPOs of Russia-domiciled and only 5 of foreign-domiciled Russian companies.

 That’s so much about APN piece. Back to the quoted Market Watch report. It cites Martin Cocker, a senior partner at Deloitte in St Petersburg, that there could be as many as 700 or 800 companies in Russia and the former Soviet Republics hoping to go public in the next few years. “While there's life, there's hope” - noted Cicero. But these numbers in my opinion are way too optimistic. Everyone here agrees that there are about 60 companies in Russia mulling IPO this year, let’s assume that “the next few years” will be three, thus we’ll get about 200; there is no way that former Soviet Republics will make the difference. Other interesting numbers were reported this week by the headhunting group Heidrick & Struggles study: more than 100 Russian businesses report they are considering or preparing for IPO, with 40% of them contemplating a flotation overseas. These numbers are easily obtained from numerous IPO-related Web-sites that are proliferating in the RUNET (Russian Internet). For example one of them lists more than 120 companies, but these are in majority the ones that declared their intentions. I think, the UFG’s estimate of 60 is more realistic.

While reading this Market Watch story I had a very strong feeling that this is a latent LSE AIM advertizing effort. AIM is good, but what about the other junior markets?

In the last year we witness here a strong competition between these alternative investments markets. More than a year ago, no one ever heard about Euronext. Now at every conference or show at least somehow related to IPO we have a presence of the same team: AIM, Euronext, Deutsche Boerse; and quite recently - the people from Hong Kong and Singapore Exchanges (!). That means that very soon we will witness real competition (like the story on a ‘war-zone’ between the Warsaw and London stock exchanges, described by our fellow blogger). According to some reports Euronext is very actively taking part of AIM’s pie (especially with small- and medium-sized enterprises - SMEs), and with advent of the Asian guys we will see some interesting rivalry that eventually will benefit the Russian companies.
And strange as it seems, we do not see Canada's TSX Venture Exchange (TSX-V) here. We have learnt this week astounding story of TSX-V smashing success. Since the beginning of 2002, the major American indices have posted modest gains. The Dow Jones has tacked on 22.5%; the NASDAQ and S&P 500 have gained 22.3% and 22.2% respectively. But TSX-V claims a 202.5% increase!!! Alongside with this, some of the individual companies on the TSX-V have posted fantastic results:

  • CV Technologies Inc. - a gain of 9,301.3% in under three years;
  • Energy Metals Corp. - a gain of 5,858.3% since September 2003;
  • Laramide Resources Ltd. - a gain of 7,403.1% since May 2004;
  • Exxel Energy Corp. - a gain of 7,217.7% in under a year

 I think that we will see some people from Toronto in Moscow very soon, if they would not be too pre-occupied with their success.

Another research report that gained commentaries in the Russian press was the headhunting group Heidrick & Struggles study. It notes that the Russian companies floating on international stock exchanges raise 20% less than Western counterparts because their standards of corporate governance are lower. Further on it shows that investors would pay up to 38% more for shares in Russian companies with good corporate governance. This is an extremely good argument for some Russian entities engaged in corporate governance, like Russian Institute of Directors or Institute of Corporate Law and Corporate Governance .

Euronext – another harbor for Russian IPOs?
Euronext is speeding its efforts in trying to get the Russian companies listed. This month we will see two appearances of its executive at two conferences in Moscow. What I see as the most attractive factors for Euronext IPOs are:
- No restriction of float value (like 20% in LSE)
- Companies listed on Euronext under GDR programs and other depository receipt programs are included in the market's index
- Alternext as a viable place for small- and medium-sized enterprises (SMEs)

Nomura, Merrill Lynch – more news
Nomura Holding announced the opening of its Russian office. This is a rather limited structure, staffed with 5 investment bankers, that shall not provide any investment banking services. According to the office director Nomura in Russia shall provide IPO advisory services and serve as an intermediary between Asian investors and Russian companies. Market experts think that it may take Nomura up to two years to create a comprehensive investment banking entity in Russia. Another big player in international markets - Merrill Lynch – got its broker/dealer license from the Russian authorities. This is rather unusual development for an investment bank, according to a number of Russian experts. Similar to Nomura, Merrill Lynch maintains their representation office in Moscow since 2004. Instead of waiting for a rather long time to get a comprehensive banking activity license, the company decided to get the broker/dealer one, which is a tad easier process. Russian market experts think that Merrill is targeted towards institutional investors and wants to find some big borrowers in the country, thus competing with Deutsche Bank and Morgan Stanley. However, they note that this is tedious task. Goldman Sachs, Lehman Brothers are already in Russia for a while and have their licenses, but they are not exactly visible. They also cite the fact that Merrill will need to have at least 100 investment banking experts; while it took about a year for Morgan Stanley to arrange their team of 70.

Lots of commentaries in media are about SBERBANK “popular” IPO. Newsmen learned about the management directive that obliged personnel of each of the branch to buy 2 shares at the price of 89,000 RUR. This is ridiculous considering the average salaries. As one of the readers comments on the Internet, five employees had to pool to buy just one share. SBERBANK’s management strongly denies this. But VEDOMOSTI daily notes that there are 242,000 employees in SBERBANK, and the official statement says that there were 46,000 individuals that subscribed. So, everyone wonders – how many employees contributed to 46K?

First Direct Investment Fund Arrives in Russia
This week there was an announcement that one of the biggest direct investment fund - TPG (Texas Pacific Group) – came to Russia. Although some other big players (like Goldman Sachs Capital Partners, CVC, Permira, Apax) are contemplating working in the country, TGP is in reality in here. The news got mixed reaction from market professionals. TGP wants to invest billions of dollars, but companies of that magnitude are scarce, unless TGP wants to be involved with some government-owned ones. But others argue that Russian oil and gas, media, IT and financial sector companies may get a piece of pie.

Russian Food Retail Sector
The process of consolidation of Russian industries is continuing – this time with the advent to the country of Carrefour, the second-largest food retailer worldwide. The analysts think that major Russian hypermarket chains (O’Key, Lenta, Karusel) are the prime acquisition targets in M&A process. Initially Carrefour starts with three sites in the Southern part of Russia (Rostov and Krasnodar), but eventually may grow to 70-80 within 3-5 years. There are three big publicly traded retailers in Russia - Seventh Continent, Magnit and X5 - all of which are trading at 30-times earnings. And these numbers make investors very cautions. This was spelled by Bill Browder, the manager of Hermitage Capital at the recent Adam Smith conference in London: "How are you going to make money from a company that is trading at over 30-times earnings? I don't know." X5 is trading GDRs at LSE, Magnit and Seventh Continent – in domestic markets. And the number of public companies will grow too. This year four more players announced their plans for IPOs – Patterson, Dixie, Lenta and Victoria.

Foreign Investments – What They Mean for Russian Business
PricewaterhouseCoopers released the results of the poll of management of 51 Russian companies from the Forbes-200 list. The questions were related to various aspects of business. What concerned the foreign investments is as follows:
- 77% think that foreign investments are important for expansion of international and regional presence
- 48% - for getting access to innovative technologies
- 34% - to manage political risks
- 17% for exit from business.

New IPO Candidates
- SEDMOY KONTINENT – 25% float at LSE – 2008
- Regional Alliance – a new ambitious project of TROIKA DIALOG – in 5 years from now, after completion of M&A processes with the regional insurance companies, get 20% of the Russian insurance market and IPO
- KAMAZ truck factory moved its IPO till 2009
- Fesco container shipping firm delayed it LSE IPO till 2008
- RESO GARANTIJA insurance company – will announce their plans for IPO in May

Russian IPOs – Changing Perception of Audit


Russian IPOs – Changing Perception of Audit

During my last five years working with the Russian companies, one of the most delicate issues was the necessity to present an audit statement according to international standards. This was the major obstacle in ANY transaction, besides usual stuff (like consolidation, both legal and financial).

This week KOMMERSANT BUSINESS GUIDE featured “Financial Reporting” and has some nice numbers. I wrote earlier about EXPERT-RA ratings. Now KOMMERSANT adds to earlier reported facts:
- Ernst & Young has 21% of the surveyed companies and is oriented towards the ones that are controlled by the government
- KPMG and PWC like any sector and ownership
- out of 13 biggest companies in Russia – 10 use IFRS reporting, while oil, telecoms and metallurgy companies use US GAAP
- the Russian companies that are getting ready for IPO try to shorten preparation time for audit opinion (e.g. ROSNEFT cut short the time by 40 days)
- gradually the time for release of annual audit opinion are shifting towards the first quarter of the year, as opposed to the 1H earlier.

When speaking about the whole picture, auditing was the prerogative of the BIG FIVE (changed later to BIG FOUR), and this was the only feasible solution for any Russian company that was involved in fundraising with foreign investors. Yes, this was a tedious task to persuade the owners to allocate funds for the audit. BIG players were not very timid in their pricing. A couple of years ago, a typical BIG auditing company asked for about $70K -$90K for the annual audit and that might take as long as 150-250 days. While these numbers are not drastically changed right now, we have more and more opportunities.

Now we see a number of Russian accounting companies that are members of international auditing chains (BKR, DFK - just to name a few of them).
This changes the picture drastically.
The Russian accounting companies can make a highly qualified audit of their Russian clients, at the same time they may stamp their opinion by their peer of one of the international chains. Why it is so good?
- the Russian companies (especially the ones that are existing for long) have a solid background in auditing domestic companies
- they do the job much quicker and with (in some cases) higher quality than their BIG peers (everyone knows here that the BIG players assign to a routine audit the novices, the ones that are less experienced, and then they just stamp their opinions)
- and of course – expenses – they differ
So, in our day-to-day operations the clients find it very very practical to use the Russian firm, rather then spent money on the BIG. I am working for a number of years with a couple of such Russian firms (e.g. BKR-INTERKOM-AUDIT ) which do excellent job and satisfy all the required needs.

So, I guess that we now witness a gradual shift from the BIG to domestic auditors. As one of the owners complained to me recently: “Well I asked one of the BIGs – we need to stand in line for about three months, pay a lot and them wait another three months for the results. This is no good.”