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

Russian IPOs – Review of the 20th week of 2007

THIS POST WAS ORIGINALLY PUBLISHED MAY 20, 2007

Russian IPOs – Review of the 20th week of 2007

Global Market DevelopmentsThere are some news reports that I guess have an effect on the Russian IPOs plans and the Russian equity industry as the whole. With this knowledge we may plan and suggest to the Russian issuers new and more effective ways of raising capital:
PricewaterhouseCoopers released their US IPO Watch Report that shows that Q1 2007 IPO activity on European markets declines. IPOs on European exchanges raised $13.3 (€ 10.6) billion, down 15% from $15.6 (€ 12.4) billion in Q1 2006. Volume declined 16% year over year from 164 to 137 IPOs. Although London remains Europe's premier IPO market with 43% of IPO volume and 81% of value, these numbers represent a sharp drop in volume and a slight decline in value compared with Q1 2006. London's decline is attributable to less activity on the AIM. At the same time US IPO activity during the traditionally quiet first quarter hit a seven year high in terms of both volume and proceeds, with $12.1 billion raised through 64 IPOs, up from $11.6 billion from 54 IPOs in Q1 2006.
Interesting enough it was concurrently reported that the London Stock Exchange bumped up its 2006 annual dividend by 50% after operating profits more than doubled to £174.2 million. The LSE's revenues were up a fifth at £349.6 million.

There are new competing threats to LSE gaining their momentum: Project Turquoise, a consortium of seven global investment banks, Plus Markets is a UK start-up, Project Boat, set up by investment banks, which plans to offer competing services in trade reporting.

Companies in the US raised more money through deals involving private placements than initial public offerings last year, demonstrating how issuers are increasingly shying away from the scrutiny and expense of the US public market. Public equity offerings on the three largest US stock exchanges – the New York Stock Exchange, Nasdaq and the American Stock Exchange – raised $154 billion in 2006, while offerings involving 144A private placements raised $162 billion. It seems that many international companies look at private placements as the best way to raise capital in the USA. According to the statistics Nasdaq receives 10 times as many applications to register placements than it does for offerings – thus the exchange is in preparations to launch an automated market dedicated to such private placements. There is also another effort in its development that strives to enhance private placements transactions – the Unified Markets.

Russia Developers in the Global Stream of Money RaisingPIK Group, a Russian developer company joins its global peers (Vector Hospitality Plc, Realia Business SA) in an effort to raise $8.8 billion in the three biggest IPOs. PIK is working with Deutsche Bank AG, Morgan Stanley and Nomura International. These are the largest IPOs in European real estate up to this date. Another IPO this month AFI Development Plc, a Russian property company, brought $1.4 billion on May 3. PIK's stock offering, in a range of $25 to $31 a share, would value the company at $14.1 billion, making it Russia's biggest property company by market value. The developer will offer new and existing shares and list them in Moscow and London.

The Beauties of Russia for Investment Banks and BankersThe Russian press reported that recent VTB IPO brought nice fees to its managers. While the total fees are about 1.6% (as compared to average 2-2.5%), everyone feels that they are good enough. VTB allocated $3.2 billion to the fees, while Citibank, Deutsche Bank and Goldman Sachs are to get $ 30-37 million, Renaissance Capital (the placement coordinator in Russia) - $7 million. Renaissance managers were smart enough and issued (in collaboration with Royal Bank of Scotland) the VTB stock certificates – that will bring additional $2 million in certificates’ commission fee (0.25%).
Another worthy piece was produced this week by Bloomberg. “The Russian market has attracted U.S. securities firms led by Goldman Sachs Group Inc., Merrill and Lehman, which are on a hiring binge as they compete with local rivals Renaissance Capital, Troika Dialog and Alfa Bank for the most experienced staff.” Thus the authors claim that Moscow bankers get $7 million payday, double New York average. Compensation for bankers in Russia rose by about 25% in 2006, exceeding the 15-20% increase in the U.K. It is interesting to read, especially for US investment bankers that think about going to Moscow.
One note on Goldman Sachs says that “Lloyd Blankfein will meet with businessmen and politicians in Russia for the second time this year when he attends the St. Petersburg Economic Forum in June. He sat down last month with First Deputy Prime Minister and presidential candidate Dmitry Medvedev. Goldman plans to double its staff in Moscow to 70.”

Banking Sector NewsNOMOS bank decided against IPO and signed an MOU with PPF Group N.V. with the goal of establishing one of the biggest universal banking groups in Russia. PPF Group N.V. operates in Russia Home Credit and Finance Bank which is one of the notorious banks as to the popular customers’ ratings trying to sack consumers’ money through hidden interest rates (those of you who read Russian may find many stories on this on a popular “peoples’ bank rating” pages). Maybe the new group will be more civilized? One of the major reasons to skip IPO, according to many experts, is the fact that NOMOS bank does not have adequate retail structure, thus impeding the possibilities to attract more investments.
NOMOS bank was to be the first Russian private bank to go public. Immediately this vacated slot is filled by one of the top regional (Tatarstan) banks - Ak Bars. The press reported that the bank is actively working with investors both in the West and in the East, particularly in Hong Kong and in Singapore. A notable fact is that Troika Dialog’s owner - Mr. Vardnayan - is on Board of Ak Bars. TATNEFT is the biggest shareholder of the bank; according to the INTERFAX rating it is number 19 in the Russian banks list as to their assets. Experts think that Ak Barks may make IPO with P/BV multiplier equal to three due to its regional location; that may raise $ 500-$600 million with 20% float. Among other private banks that are mulling IPO is Zenit Bank that is also owned by TATNEFT.As the strive of foreign banks to expand operations in Russian continues, a Russian subsidiary of HSBC has received a license for operations with individuals in Russia (provide deposits, loans, mortgages, credit cards and asset management). The bank plans to set up its own retail network by the end of 2007, however many experts believe that HSBC will eventually prefer to buy a Russian bank. Indeed, establishing owned network is time consuming (more than a year) and expensive (about $ 350,00 - $ 400,000).

MICEX Mulling IPOOn the annual shareholders meeting of the MICEX one of the most discussed issues was the way to attract financing required to cover operational risks. According to the MICEX’s officials, although the question of IPO was not on the agenda, the idea is vital and there is a possibility of the stock exchange’s IPO within the next 5 years. The MICEX’s management is going to seriously address the issue within this year.

Another Privatization DriveAs I wrote earlier we are now experiencing a new wave of privatization efforts. This week a new evidence emerged - Russia plans to privatize half of its stock of railway trucks in a sell-off expected to raise $2.3 billion. According to the Transport Minister Igor Levitin a company holding half of Russia's rolling stock, or 260,000 rail cars, would issue shares in 2007 or next year. This is another elaboration on the previously reported plan to establish a single subsidiary company and attract from $2 to $4 billion.

Good-bye Mr. Soros
As we know that Mr.Soros failed to implement his long-standing plans for Russia we do welcome the latest news that he (Soros Fund Management LLC) sold his 0.35% stake in Vympelcom and 1.3% in Wimm-Bill-Dunn. That’s a good piece of news, as everyone knows that Soros and his people did nothing good to Russia – I wrote about it earlier.

New IPO Candidates
- IFC Metropol Canada – possible first Russian IPO on TSX

- An integrated company created around Sovkomflot comp and the Novorossiisk Shipping Company - IPO in 2008
- OJSC ROSINTER RESTAURANTS HOLDING, restaurant company in Russia and the CIS – IPO in Russian and USA
- Vitrina A, advertising agency – IPO in 2008 after establishing a holding company (ThisWayGroup – TWG) with Retail House and Brandflight
- The Russian Strategic Growth Holdings Plc, a Russian buyout fund of Russia's National Bank Trust and Trust Investment Bank – AIM listing this year hoping to raise $ 150 million

Russian IPOs – Review of 19th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED MAY 13, 2007

Russian IPOs – Review of 19th Week of 2007

Russia's Perspectives by Morgan Stanley
Dow Jones this week published a news item (Emerging-markets Fund Managers See Rebound For Russia, China ) about report by Morgan Stanley Capital International on emerging markets. While noticing that China and Russia have delivered lackluster stock market returns this year, the report states that:

- Russia faces political risk and depends heavily on oil and gas prices, but it's generally considered the cheapest of the BRIC markets. Russia has better long-term growth prospects than most other emerging markets and should outperform in the next 12 months.

- The country is using oil and gas profits to put money into improving infrastructure and financial systems

Record Trading Volumes on MICEXRussian stock market continues to gain its momentum. Just recently the trading volume on the MICEX stepped over the psychological barrier of $ 10 billion and it going on further and further. Last week (May 4th) there was a new breaking record of trading - $ 14.506 billion. Experts note that this was due to investors’ activities prior to the VTB IPO. Turns out that technically the stock exchange was not expecting such overload and over the last month there were 4 hardware and software glitches that resulted in suspension of trading. Some market players estimate that by the end of the year we may see 40% increase of MICEX trading and another psychological barrier of $ 20 billion.

Investment Perspectives - Another HorizonsA few weeks ago I wrote about new wave of privatization and its affect on investment business. This week we learned that the government included into privatization lists another set of assets that may cater for investors’ appetite. These are: KamAZ, SG-Trans, MiG Aircraft Construction Corp. The latter envisions initial turning it into a joint stock company. Then, together with Sukhoi Co., MiG will merge into United Aircraft Construction Corporation. The additional privatization program also sets forth ten aircraft repair plants.Different aspect is associated with the construction boom. Moscow City government has approved the general plan for hotels construction in the city. As many as 353 hotels capable of hosting 118,000 will emerge in Russia’s capital in four years. And probably by the end of 2010 Moscow will have 556 hotels instead of the current 203. In view of announced figures, Moscow will have a new hotel each fortnight. This I guess will be a definite reason for more IPOs and private placements in construction and developers’ sector.

And Another News from Air Carrier SectorAs I wrote earlier, the Russian State capitalism has an interesting new form that combines government and private ownership. This week there is another example in this field: five Russian Federation-based airlines which currently co-operate under an alliance known as AiRUnion are set to have common ownership as a joint stock company also named AiRUnion. On 2 May 2007, President Putin, signed a decree on the establishment of the company. The ownership structure will see the Russian Federation owning 45% of the holding company and private investors the remaining 55%. Initially the AiRUnion alliance was created in late 2004 by KrasAir and includes Domodedovo Airlines, KrasAir, Omskavia, Samara Airlines and Sibaviatrans. The combined new holding will have a fleet of more than 70 aircraft. AirUnion is supposed to assist in development of Hungarian airline Malev, itself recently privatized and sold to AirBridge Zrt a Hungarian company backed by KrasAir.

OMX is in the News Again…
OMX goes on with their aggressive expansion. This week they added new dimension to it with the press release about new 2007 initiative – expansion of First North to Baltic region. First North is an alternative market created by OMX, and has already been launched in Denmark (2005), Sweden (2006), Iceland (2007) and Finland (2007). Claiming that First North is one of the fastest growing alternative markets in Europe, the press release states that First North will be launched during 2007 in the Baltic countries. The stock exchanges of Tallinn, Riga and Vilnius are currently adjusting their listing rules and are establishing their Certified Advisers (analogues to NOMADs). Well, this is another suggestion in the growing number of junior markets. Statistics show that Q1 2007 (7 IPOs with € 15 million raised – that places it #4 among European peers) was relatively modest for First North and World Federation’s of Stock Exchanges (WFE) data does not list Tallinn, Riga and Vilnius stocks exchanges as the prominent ones, but we had seen some IPOs there too.

RAO UES IPO Plans – Chubais
Institutional Investor magazine published an interview with Anatoly Chubais who is in charge of Unified Energy System of Russia. I guess it is worth reading, and here are just two points from it:
- “Whatever new political cycle comes in 2007­-2008, and whoever becomes president, the country will still need light and heat. The new leader would have to be a complete lunatic to wreck this process of investment. Besides, I don't anticipate any big political disturbances connected with the coming presidential elections. “- “In the fall we conducted the IPO of generating company OGK-5, and that demonstrated the practicality of our logic. The IPO was oversubscribed ten times, and the company's capitalization has risen 40 percent since then. For the next stage we are looking at about 17 IPOs, raising closer to $15 billion than $10 billion. If market demand begins to fall off, naturally we will delay to some extent. Some of the IPOs will end with investors owning more than 50 percent; some will require a capital increase later. “

European Venture CapitalAs continuation of my previous post on investments in venture capital, just a few points from the quarterly European Venture Capital Report released by Dow Jones VentureOne and Ernst & Young. The IT sector had the most significant upturn of any industry in the first quarter. A total of €550.2m was invested in 133 technology deals. The software and information services segments showed the most activity for the sector. Software deals increased by 20 per cent over the same period a year ago to 73, and investment increased 11 per cent to €222.5m. Deal flow in the information services segment increased 131 per cent to 30 deals, and capital increased more than two-fold to €114.7m. The emerging interest in Web 2.0 technology seems to be fueling this growth in European technology investments.