Russian IPOs – review of 12th Week of 2007

  THIS POST WAS ORIGINALLY PUBLISHED MARCH 23, 2007

Russian IPOs – review of 12th Week of 2007

ML on Investments in RussiaMerrill Lynch investment bank published the results of its Survey of Fund Managers for March with their assessments of investment perspectives in various sectors of the market. A total of 199 fund managers participated in the global survey from March 9 to March 15, managing a total of U.S. $668 billion. A total of 173 managers participated in the regional surveys, managing U.S. $412 billion. A net 34% of portfolio managers believe it unlikely that stock markets will be lower six months from now, up from 15 percent in February. Even though about 200 of the managers said that Russian assets had become less overvalued, the assets of Russian companies still come in third in the developing markets, after South Korea (50%) and Brazilian (67%). In the January survey by Merrill Lynch, 56% percent of managers said Russian assets were overvalued. In March, 33% percent of managers said so.

Hermitage Stays On
Hermitage Capital Management plans to continue its work in Russia, despite drastic drop in the volume of investments. Despite all that difficulties that Bill Browder, the Fund’s CEO, is currently experiencing with Russia, he stated this week that “There is no single country that offers as many opportunities on such a consistent basis as Russia”

Japanese Think High
On March 16 the Japanese Credit Rating Agency announced that it has assigned A-/Stable and A/Stable ratings to Russia’s foreign currency and local currency long-term debts. This reflects Russia’s comparatively stable macroeconomic performance driven by exports of natural resources in recent years; shows the government’s rapidly improving fiscal position amid the favorable economic performance, a and a fast improving external balance.

Dangers for Russian IPOs?
Reuters continued this week with the gloomy forecasts on Russia. According to its reporter Elif Kaban Russia's $30 billion IPO plans for 2007 seem to be in doubt as the value of recent Russian stock listings plummet and investors flee emerging markets. The agency cites LSE’s Jon Edwards that 80% of trading on the LSE international order book was now in Russian shares. Reuters further notes that most of the Russian IPOs are cash-out deals, and quote Eric Kraus, head of Nikitsky Fund, that Russian IPOs are "suffering from a combination of the naked greed of Western investment bankers and the unbridled exuberance of company owners."

M&A on the Rise
KPMG reports on valuation of the Russian M&A market. It notes rapid upsurge in volume (57% increase – from $40.5 billion to $63.6 billion), while the average transaction volume ($77.8 million) decreased 3% as compared to 2005. This is the result of increase of mid-level deals. At the same time the report states that the transparency level increased – in 2005 56% of the transactions were disclosed, as compared to 30% in 2005. This in part is the result of preparation for IPOs by many companies and increasing participation in the processes of financial consultants. KPMG also points that the trans border M&A transactions increased twofold in 2006 as compared to the previous year. At the same time we witnessed the changes in the structure – about 60% of transactions involved acquisition of Russian companies by the foreign ones.

Russian Stock Market to Be Regulated Soon
The head of the Russian Federal Financial Markets Service (FFMS) Oleg Vyugin thainks that by the year-end the Russian stock market would be viewed as a regulated market under international standards. Vyugin mentioned that Russia is currently at the first stage of the market's development, which provides for the increase in the companies' capitalization. The next step will be joining the International Organization of Securities Commissions (IOSCO).

Is Europe Open for the High-Tech Russian Companies?
This week we got some more evidence that European stock markets seem to be looking very favorably to the listings of the Russian companies. One of my colleagues that participated in the investment conference this week reports that he had very healthy discussions with representatives of Deutsche Boerse and Euronext. We are very keen to listen to these suggestions hence FINAM runs a FINAM-IT mutual fund that has a number of quality IT companies on board. This is in line with XING’s successful IPO on Frankfurt stock exchange last December. Unless American regulators lax their SOA requirements very few Russian companies are thinking about the USA. I really agree with a recent comment of one bloggers
that as compared to the 90-ies Internet bubble, high tech companies are now (i) more mature; (ii) IPO candidates meet a truly European investment community, where national barriers no longer matter that much. FINAM has in its portfolio some quality high-tech companies that in my opinion would have a great success with European investors.

Marchmont Effort InaugurationAbout six month ago I met a very rare paragon of an American businessman who lives NOT IN MOSCOW, but in a detached city of Nizhny Novgorod. This week it was announced that Kendrick White, managing principal of Nizhny Novgorod-based Marchmont Capital Partners published the first ­volume of the Marchmont Investment‑Guide. I guess this is a very promising effort to open “riddle, wrapped in a mystery, inside an enigma” – provincial Russia. "Many investors in Russia know only Moscow -- one of the most expensive cities in the world. But doing business in Moscow is not the same as doing business across all of Russia, as some regional administrations are far more progressive in attracting investors than others," says White. Congratulations!!!

New IPO Candidates
- Kaspersky Lab, computer security software company, is considering listing on a Western stock exchange; however these reports are questioned
- ROSNO insurance company - IPO – autumn 2007 hoping to raise $400M
- TGK-6, UES's power generator IPO in 2008
- TECHNOSILA, electronics and consumer goods retail chain – IPO in 2008

And finally a bit of discouraging news: The U.S. dollar fell below 26 rubles on the Russian currency market for the first time since October 1999. This was the result of two simultaneous factors: high interest on the interbank loan market and the weakening of the dollar against the euro on the world market. WHAT’S AHEAD???