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