Russian IPOs – Review of 21st Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED MAY 27, 2007

Russian IPOs – Review of 21st Week of 2007

Upheaval of World’s IPOs and RussiaFinancial Times of London notes that this year we have seen a dramatic increase of initial public offerings by emerging-market companies. So far during the fist five months of 2007 the raised money represents half of the volume for all of 2006. There were 268 emerging market IPOs, which in total raised $53.8 billion. That compares with this time last year when 184 IPOs had raised $25.6 billion. The paper cites three reasons:

(i) ample liquidity in the financial system,

(ii) a strong appetite for risk among investors;

(iii) growing demand for new equity from fast-growing companies.

It is really amazing – just in nine days three biggest IPOs have taken place: Russian VTB with $ 8 billion raised; the $1.85 billion offering by Halkbank, Turkey; and the $1.4bn flotation of Russia's AFI Development.Russia is planning to have many more public companies in the nearest future. Alexander Zhukov, Deputy Prime Minister of the Russian Government, stated that about 170 Russian SMEs are mulling IPOs. He was speaking at the Russian-American round table meeting in Moscow. And on May 25 Finance Minister Mr. Kudrin spoke about 70 companies in the nearest future.
In the view of this news, it is appropriate to note a small news item published by FINANCE magazine this week with a meaningful title: “IPO Evolved to a Rather Sound Way to Cash Out”. The author thinks that way back in 2003-2005 the Russian assets were priced rather cheap. So, at that time the owners were reluctant to give away part of the business. But in 2006 the businessmen understood the price that the market was ready to pay. And this price was way above their anticipations. Thus, IPOs surfaced as the best way to cash out. As an example PIK construction company is cited. The owners valued the company at $ 1 billion at the end of 2005, now Deutsche Bank, Morgan Stanley and Nomura International collectively think that it is worth $11-14 billion. Even though the owners would lower the price corridor during upcoming placement, this is still well over their expectations. And AFI’s IPO is a very good example.

Russian Economy and Stock Market
There had been a qualitative growth of the Russian economy that opens new possibilities for investments. This point of view was expressed by the Russian Minister for Economic Development and Trade German Gref, who made a speech at the annual council of EBRD governors in Kazan. Now the economy shifted from dependence on accelerated production of raw materials. Most of the sectors of the Russian economy are developing efficiently enough. As an example he instanced the development of the stock market.

This week the MICEX released some data that correlate with Mr. Gref’s statement. It still remains the major Russian stock exchange (in 2006 MICEX had about 90% of turnover of all Russian stock market) and it is appropriate to assess the entire domestic market by MICEX’ performance.

In one year trading volumes increased by 3.3 times, investor base increased by 51%, with 48% increase of private investors.As of May 1, 2007:- 288 shares of 190 issuers are trading
- 583 bonds of 417 issuers are trading

 

There were a lot of speculations last year that there is a lack of private investors in Russia. Here is the data that shows a drastic increase just in two years.

 

At the same time there is a visible shift from trading of Russian ADRS from abroad to Russia. Thus turnover of Russian ADRs on MICEX is 1.3 times of IOB LSE’s turnover. That shows that world investor community is looking on Russia, as one of the financial hubs of the world.

Oleg Vyugin in PlaceThis week the intrigue with Oleg Vyugin, former head of Russia's FFMS, ended with the announcement that he will become chairman of MDM Bank. After Mr. Vyugin’s resignation on May 10 there were wide speculations that he is going to join Goldman Sachs. However, the press reported that MDM bank suggested more favorite compensation package. MDM Bank is rated among Russia's top 15 banks by assets. Even before Mr. Vyugin was officially approved by the bank’s Board, he met with reporters May 24 and noted that the Russian stock market may collapse by the end of the year, fix all revenues and then rise again. In Mr. Vyugin’s view this is a positive development, similar to the one that was last summer, when after market’s fall, more investors arrived. He also stated that the Russian stock market is unstable since Februarys this year and this strongly scares investors off. Latest IPOs of Sberbank and VTB add more instability to the market.

Investment OpportunitiesAirports. Kommersant Daily reports that the Russian Aviation Agency drafted a strategy for development of airport infrastructure. According to the document Russia will have 121 major airports and 12 of them would be international transit points. Each of international hubs will host its own airline. It is estimated that by 2015 about 820 billion rubles would be invested – 64% shall come from federal, 33% from regional authorities, and the rest from private/government investor entities.
Timber Industry. The Russian government is discussing the plans to introduce large benefits to investors in timber industry. This due to the fact that timber supplies exceed needs of timber producers by one-third. On the annual basis the forest increases by 920 cubic meters, and only 186 cubic meters are processed. The key question in discussion is that investment projects worth more than 5 billion rubles would get forest sections without auctions and pay 50% of the rent or even no rent at all

EBRD Russian ExpansionAs the result of the mentioned above meeting in Kazan the European Bank for Reconstruction and Development (EBRD) is going to open several offices in Russia and also expand its operations including Far East in its sphere of interests. In another development, it was announced that EBRD acquired a blocking state in SKB BANK that is located in Yekaterinburg in Siberia.

Jack Welch and Russian BusinessmenI reported earlier on the meeting of Skolkovo Moscow Business school audience with Jack Welch, former CEO of General Electric. This meeting was well publicized in Russian mass media and attracted also prominent Russian businessmen. Interesting to note that the meeting was held in just restored residence of the Russian BOYAR (court nobility) where Ivan the Terrible was receiving the reports of his noblemen and often executed them after the session. Mr. Welch told that the key to running a successful company was leadership, transparency, vision -- and beer. This was a Q&A session where the present listeners were able to ask any questions they like. "Russia, with its incredible wealth right now, the only thing it could do wrong is not use that wealth to expand globally," said Mr. Welch. He also reminded the well-known 20-70-10 ratio regarding personnel management, spoke on M&A and reverse mergers. One of the things that amused the audience was his statement that it is imperative to celebrate the victories of staff and to show appreciation. "In my early days, I'd bring a keg of beer in every Friday night".

Advent of Church's ChickenChurch's Chicken - a U.S. chain of fast food restaurants specializing in fried chicken is coming to Russia. As it is usual for the company in some countries it will open the restaurants under the TEXAS CHICKEN brand. The first outlet will start operations in Moscow in August, the second one – in September in St.Petersburg. Church's Chicken program envisions opening 30 restaurants within 3 years with investments of $ 20 million. Experts believe that to be successful the company has to hire quality Russian management; otherwise it may follow unsuccessful way of Subway chain that is struggling to conquer Russian market since 1994.

New IPO Candidates
Eurokommerz, factoring company – IPO in 2008
Korston, group of companies – AIM IPO of its main asset - Orlyonok Hotel Complex – in 2008