Russian IPOs – Review of the 2007 7th week

THIS POST WAS ORIGINALLY PUBLISHED FEBRUARY 15-16, 2007
  
 
IPOmania
This week witnessed a quite a few media reports on Russian IPOs. Everyone seems to analyze everything – starting from general descriptions to lists of IPOs. But basically, everyone plays around valuations and 2007 prospects, citing the same sources – ALFA BANK, UFG. I guess there is a definite lack of any new judgments here – take any news item and you will read about $30-$40 billion estimates. The sour note is last November Citigroup's survey predicting decline, which was supplemented this week by UFG concurrence. However, LSE Chairman thinks we will see about the same number of Russian IPOs at LSE. Extremely interesting piece was published in KOMMERSANT Daily. IPO frenzy is overwhelming among the businessmen. The owners of any worthy asset in Russia know for sure: the time will come and IPO is inevitable. Now, every decent businessmen here knows – IPO is a must for any good business. But the bottom line idea is – I want to make IPO and dump 20-25% of my personal stock to investors. Another thing is – initial idea of public offerings was to make a new start of business; however in the Russian case is it mostly viewed as the exit point. KOMMERSANT stresses that one of the real reasons for IPO boom here is unwillingness of the businessmen to get a new equity owner of 30-35% , rather to dilute the shares among the good number of public shareholders. Ok we may argue with it, but the time will show …
The politics are grim, but the economy is sparkling
Ian Hague, co-founder of Firebird Management LLC points: “The increasingly vibrant domestic growth has pulled in billions of dollars of direct investment as international firms from retailers to carmakers try to get a piece of the consumer spending bonanza.” The Firebird Fund and Firebird New Russia Fund have returned 60.8% and 50.4% respectively over the last year and are 90% invested into Russian equities. The biggest funds are the Firebird Republics Fund and Firebird Avrora Fund. Like most investment in Russia, these two funds are hunting for opportunities in the regions and returned 69.1% and 50.5% over 2006. It seems that the country’s economy “IS sparkling”. The Russian stock market is booming – just one of the examples – FINAM Investment Company in 2006 increased its transactions turnover on MICEX (the leading Russian stock exchange) by 180%, and in January this year it reached 250 billion rubles (about $ 9.43 billion). And there is much more opportunities for private equity investors in Russia. According to Michael Calvey, the managing director of Barings Vostok Capital Partners the total amount of private equity investment made to date in Russia is $40 billion, of which foreign investors account for only $2 billion, or 5%. Russian minigarchs are active but there definitely is a room for foreigners too, like Texas Pacific Group (TPG).
How are the Russian AIMs Doing?
We also heard an interesting observation from John Edwards, LSE senior manager for Central and Eastern Europe, regarding the prospects for setting up Russian stock exchanges for small and mid-sized companies similar to AIM. He notes that setting up exchanges that really work requires time and time is needed in order to expand the potential of market and gain investor trust. The AIM has only really been working for the past three years out of its 12 years of existence, he said. We think that in general Mr. Edwards is right, but we do have a good number of investors in place. I have heard a lot of remarks, like: “ we have money in Russia, but we do not have a quality product”. Thus, I guess that Russian AIM options will be very timely here. I will have more details on MICEX Russian AIM later this month.
 Shock absorbers
Ariel Cohen of the Heritage Foundation in Washington commented on President Putin’s speech in Munich: “there was nothing in the speech to indicate that Russia will clamp down on international companies; and with the exception of "strategic" oil and gas projects, and some high-tech ones, foreign investment in Russia is unlikely to suffer all that much. For Western investors, Russia offers a huge unsaturated market for housing, energy services, capital, and consumer goods, education, even travel and leisure. Western business will be missing out if it ignores Russia.” I guess, it is true, and we are prepared as Mr. Cohen points – “to play the role of shock absorber”.
Joining China and Latin America
As I wrote earlier, the Russian government is gradually increasing its stakes in Russian companies. We are now in line with China (in 2006 the government owned 51.4% of public companies), Venezuela (the government set the goal to have 60% stake in public entities), Bolivia and Ecuador.
Foreign Banks Welcome?
Russia may allow foreign banks to open branches in the next seven to ten years, - it was announced by the Economic Development and Trade Ministry's trade negotiations department. That would be a major step forward in expansion of foreign banks into the country. Branches, which are governed by the rules of their home central bank, rather than subsidiaries, which are under the auspices of the Central Bank of Russia, have a distinct competitive advantage and enjoy lower costs of capital as they can draw on their parent bank's resources at home.
Roll Up the Sleeves
INTERFAX news agency reports official statistical data as of January 2007 on legal forms of 3,361,000 Russian enterprises:
- 78% are commercial; 18% - non commercial;
- there are 2,300,000 LLCs (the simplest legal form) – 85%
- 197,000 (8%) – joint stock companies - closed and open(public)
- 27,500 (1%) – production cooperatives
- 14,600 (0.4%) – state unitary enterprises
Full and general partnerships are not popular (549 and 792 entities, respectively).
This stat data is very meaningful for financial advisory and consulting companies. Only 8% of total Russian companies actually HAVE shares, so we may speak about equity investments. OK, ROLL UP YOUR SLEEVES – to the field!!!
Sberbank “popular” IPO
Highlights of the saga:
- it is too late in invest in Sberbank – announces EXPERT-RA rating agency. It thinks that the situation is very similar to GAZPROM’s failure after ROSNEFT’s listing. VTB will kill market cap of Sberbank. The latter is in no way a competitor to VTB.
- It was reported in the news that the management of Sberbank in its internal memo obliged the medium-level management to subscribe to the shares. This seems really uncomfortable – the suggested price for one share (abve $ 2K) is way too high for an average Russian employee.
We Eat Too Much
ACNielsen adds new appetite to investors. In its report the agency notes that Russia's food market is the fastest growing in the world:
- the country’s food trade volumes grew three times faster than the 2006 global average
- pre-cooked food products sales increased by 41% in 2006
- fizzy drinks were up 18%
- yoghurt products and juices up 18%
- dairy and juice producer Wimm-Bill-Dann - a 30% growth in 2006 sales for 9 months
- new companies are entering ever month. Wrigley's bought Korkunov chocolate producer, Danone, Nestle and Bunge have all also announced plans to expand their existing production and distribution in Russia.
Same goes for the baby food market:
- the fastest Russian growth rate of 20% in 2006, reaching $446M in sales (in 2005 the numbers were 11% and $371.5M)
- the market could grow by another 15% in 2007.
New IPO Candidates
- RAO UES CEO Anatoly Chubais pointed that one of the main sources of funds for the holding’s investment program will be IPOs. In 2007, UES plans 15 IPOs to attract $15bn - seems to be not really realistic, as compared to the 2006 Russian IPOs volume
- Power Machines, turbine maker is hoping to attract some $1 billion by 2010 through an additional share issue and follow up IPO
- INKOM-AVTO, one of the biggest Russian auto-retailers announced about a private placement transaction that most of the analyst think is the first step to IPO;
- GAZMETAL HOLDING – in 2008
- Nomos-Bank will offer less than a controlling stake in a planned IPO in London and Moscow before the end of 2008
FINAL touch
Bermuda is seeking to liquidate nine companies owning billions of dollars of Russian telecommunications assets as part of an effort aimed at protecting the island’s reputation as a leading financial centre, the British Financial Times reported on Tuesday, Feb. 13