Russian IPOs and more – Review of the 28th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED JULY 15, 2007

Russian IPOs and more – Review of the 28th Week of 2007

Sovereign Funds

I briefly touched the subject of sovereign funds earlier, and this week the international discussion is gaining its momentum. While I have neither ability, nor big desire to discuss the issue in detail, here are some observations.

An interesting table was provided by the Economist that shows the place of Russia in the system calculated by Morgan Stanley in March 2007.

Another estimate was released by Stephen Jen, global head of currency research at Morgan Stanley in May 2007. And a sound overview of the funds and the U.S. attitude was provided by Department of Treasury a few weeks ago with the text of remarks by Acting Under Secretary for International Affairs Clay Lowery – the sovereign wealth funds “raise broad, strategic issues for the international financial system”. This week International Herald Tribune examined the situation in Europe and German concern over investments of Russia and China: “Europe looks at controls on state-owned investors”.

Investments in Russia

Continuing on my earlier suggestions for investments in Russia, I would like to point to a good analysis posted by MORNINGSTAR that shows the benefits of investing in Russian telecom shares. “We also think that the political risk of investing in the telecom sector is less than in the oil and gas sector. That said, political risk still makes these firms riskier bets than telecoms in other markets; Russia's penchant for disrespecting property rights warrants a speculative risk rating and a large margin of safety before investors should consider buying.” This is in line with my previous recommendations to invest in construction, railway carriers and telecoms.

A pretty good potential for the Russian construction sector show the results of 2006 M&A deals in this sector that was released by the mergers.ru project: there were 109 transactions with the value of $ 1,939.5 million with the average transaction value of $ 16.8. Only 4 transactions were valued over $ 100 million; 9% of overall volume was acquisitions by foreign companies. And construction sector had only 3% of overall cost value for 2006 Russian M&A.

As a timely illustration for my deliberations I want to cite this week’s announcement that the European Commission cleared a joint venture between Deutsche Bank AG (DBK.XE), Austrian construction company Strabag SE's (STB.XE) investment unit Strabag Invest GmbH and Moscow real-estate consultant Dmitri Garkusha to develop large scale real-estate ventures in Russia and surrounding former-communist countries. The joint venture will finance and develop "major real- estate and infrastructure projects" not only in Russia, but also Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan and the Ukraine. Strabag is 30% owned by Oleg Deripaska and is planning IPO this year.

Renaissance Capital Tops Russian Banks

Renaissance Capital outranks every other bank, international or local, in the Russian Equity Capital Markets in the first half of 2007, according to separate rankings produced by independent data providers Dealogic (SEA:DL.) and Thomson Financial (NYSE:TOC). Both surveys name Renaissance Capital as the leading investment bank in Russia in both value and number of ECM deals carried out in the first six months of the year. The news also follows a string of other independent rankings in which Renaissance Capital has consistently emerged as the dominant international emerging markets investment bank, including becoming the first ever emerging market-based bank to break into the top 10 rankings of bookrunners for European initial public offerings. Renaissance moved up to sixth from 20^th position at the same time last year according to Dealogic. Among the major ECM transactions Renaissance Capital has led on this year are the $8 billion IPO of VTB, as well as the IPOs of MMK, Integra, Sitronics, Volga Gas, Dixi, Nutritek and Rosinter, and also several secondary transactions and private placements. In total Renaissance Capital has advised on 12 ECM transactions in the first six months of 2007, with a combined value of $12bn.

 

GAZPROM going to Internet

Gazprom Media is the latest of the media holdings that starts investing in Internet. It was reported this week that it is now in discussions regarding acquisition of the video-exchange portal RuTube (a Russian clone of YouTube). This late arrival to Internet will have the high price for Gazprom Media (which is usual for newcomers) – according to FINAM’s estimates RuTube is highly overpriced. It is also reported that in 2008 the holding’s budget has about $ 100 million for Internet acquisitions.

More Soups for Russians

Following Starbucks (NASDAQ:SBUX), Campbell Soup (NYSE:CPB) is another newcomer to Moscow. This week the company announced that in October its products are to be sold in Moscow – with beef, chicken and mushroom varieties. So far Campbell Soup is more known to Russians through Andy Warhol’s but many analysts think that the company may have success if the promotion would be aggressive.

Although the competitor products here in Russia are widely distributed in the supermarkets and small shops (Gurmania by Mars; Knorr by Unilever) I think that the consumers would welcome the new add-on. Traditionally Russians consume more soups that anywhere in the world, and most of them are homemade. But in recent years the younger generation is becoming more and more attracted to buying these products.

And finally – INTERFAX released a commentary that discussed the Russian stock market – “An ideal model for the Russian stock market in mid-term” which is worth reading.