Russian IPOs – Review of 25th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED JUNE 23, 2007

Russian IPOs – Review of 25th Week of 2007

This week was full of events and significant news regarding Russia and investments. Renaissance Capital, one of Russia's leading investment banks, held its 11th Annual Investor Conference "Russia: Investing in Prosperity." I posted earlier some information on the speeches of Renaissance Capital CEO Stephen Jennings and former U.S. Secretary of State Colin Powell. The American Chamber of Commerce held two of its regular breakfasts for members, with guest speakers Robert Kimmitt, Deputy Secretary of the U.S. Treasury Department, and Bill Bradley, former U.S. Senator and presidential candidate. Basically all mentioned events tackled the issues of investments in Russia, and most of them did it on the positive wave. A whole array of research papers and surveys were released this week.

Merrill Lynch Tops the Russian Stock

Dow Jones reports that Merrill Lynch (NYSE:MER) on June 21 released a research report on Emerging EMEA (Europe, the Middle East and Africa) that shows Russian stock at the top of ML’s list of preferred stocks.

Ernst & Young Report

This week E&Y released "Globalization: Global IPO Trends Report 2007" report that is one of the best current overviews of what is going on the IPO market. Globalization is the driving force behind many IPO trends throughout 2006 and Q1 2007 – is the major highlight. The growth of cross-border trading has obliged local exchanges to become more liquid and stringent. According to the survey, most IPOs are held domestically because companies have most of their client base inside their countries — 90% of the world’s companies choose to list in their primary market. Russia continues to drive the growth in the European markets. Some interesting points of the report are:
· Growth-hungry investors hunt for higher returns abroad, especially in emerging markets.
· As global capital expands its horizons with more world-class financial centers, Hong Kong and London lure the top global IPOs.
· Global bourse rivalry leads to transatlantic NYSE Euronext merger, and more exchange alliances expected soon.
· Europe’s IPO markets rose to an all-time high in 2006, and remain high-flyers in 2007, bolstered by beefy deals, cross-border listings in London, and private equity.
· As the region’s high-growth story, Russia drives European IPO activity.
· London has become the top listings destination for cross-border issuers seeking relatively quick and easy capital.
· Europe’s junior exchanges, including London’s AIM, the Euronext’s Alternext, and Deutsche Borse’s Entry Standard, are thriving with small-cap activity.
· The ballooning growth in European private equity is leading to more IPO exits, and sizeable public-to-private transactions.

The report notes that more international investors have begun to set up branch offices in Moscow to enable local capital fundraising, especially with smaller deals. “Regardless of where a company lists, in London or in Moscow, 80% of the buyers will be the same, mostly the large international names, and all are set up to buy shares both locally and internationally. There are only a handful of international names that still require London listings to buy Russian shares,” notes Anton Cherny, Managing Director, Head of Equity Capital Markets, Renaissance Capital. But another expert - James Klein of the Capital Markets Group, Ernst & Young, Russia, says most investors would still rather deal through London, as the Russian exchanges still lag far behind London for execution, costs, and transparency.
Russian Stock Market – Changes Ahead
Almost simultaneously with the release of E&Y report VEDOMOSTI DAILY published a detailed overview of the Russian stock market by Oleg Vyjugin, a former head of the Russian Federal Financial Markets Service (FFMS), who is now the Chairman of MDM bank. I guess there is no other expert in Russia that knows the subject better. Now when Mr. Vyjugin is not on the government service, he is open to express his views to the public. It seems that these two reports were tuned in time and expressed the same thinking. One of the key ideas, expressed by Mr. Vyjugin is that over the last 10 years the Russian stock market had undergone profound changes – the assets of the Russian companies are attractive indeed even for the most conservative investors – but the exchange technologies are still at the old level – not acceptable for major foreign players. Moreover, instead of thorough evaluation and introduction of new solutions in technology, both major Russian exchanges are involved in competitive struggle within one and the same exchange instruments area for one and the same clientele base. This distracts the Russian exchanges from the genuine development tasks that are now in place regarding global competiveness of stock exchanges. And, as Mr. Vyjugin names it “a game of insane rivalry”, plays well in the hands of LSE, that “willingly receives with success a lined up succession of Russian issuers, gaining commissions that otherwise would be used to develop Russian exchanges”. The fundamental reason for stagnation of the Russian stock market infrastructure according to Mr. Vyjugin is inadequacy of its corporate structure and corporate management. And the first hand solution is to make assets of the stock exchanges available to public through IPO or sales to strategic investors. It is obvious that international stock exchanges may express strategic interest in Russian infrastructure.
The views of Mr. Vyjugin to a great extent were supported at the meeting of the MICEX Stock Exchange Committee, where the new FFMS Chief Vladimir Milovidov made his first public appearance. The meeting was attended by the top Russian bankers and stock exchanges officials. The key question in discussion – the competitiveness of Russian stock market and ways to increase it. The projected scenario in the view of FFMS is the merger of RTS and MICEX.

More Russian IPOs in Autumn

IPO market shall witness a constant inflow of new transactions from Russia. This was expressed once again by Anton Cherny of Renaissance Capital, in his interview with RBC-TV. Q1 and Q2 IPOs resulted in certain investor weariness, but autumn will be the time for another big flow. Cherny thinks that these would be the companies from finance and real estate sectors. Regarding anxiety over the 2008 elections, he noted that this factor would greatly affect international investors that are dealing with much politicized sectors, e.g. energy. Those sectors that are in majority privately owned would not be affected.

There are some interesting news feeds on the Russian economic situatrion
The Economist Intelligence Unit ViewsWire released Russia's booming economy - It's not about just oil and gas: “…in the context of the near stagnation of hydrocarbons output, Russia’s growth performance is surprisingly robust and well above the long-term trend rate. “I would also recommend to read a notable article in the Newsweek International by Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management: “Investors who have looked beyond the sensational headlines in the international media have made extraordinary gains in Russia. China and India may have registered faster growth rates, but companies catering to domestic demand in Russia have been able to achieve higher profitability, as the reduced hype surrounding Russia has resulted in less intense foreign competition on the ground compared with the opportunity presented by the economic boom."

More Investments

The Volvo Group (NASDAQ:VOLV) is investing a total of SEK 935 M in an assembly facility. The new facility, located in the city of Kaluga will have a capacity of 10,000 Volvo trucks and 5,000 Renault trucks per year. It is scheduled to be completed in 2009. It is interesting to note that the demand for used trucks from Western Europe has been strong in Russia (about 5,000 used Volvo trucks were imported in 2006). Volvo Trucks recently invested SEK 100 M in a wholly-owned service facility strategically located just south of St. Petersburg on the expressway to Moscow.

Russian Equity Market and US M&A Grand-Dad Coming to Russia

The E&Y report that is mentioned above briefly tackles the Russian Equity market that is way underdeveloped. “Currently, Russia’s private equity industry is under development — it’s not the traditional private equity industry seen in the West, and there are no leveraged buyouts,” says Anton Cherny, of Renaissance Capital. “But there are quite a few local and international players who are happy to take private risk, and buy into unlisted assets.” Cherny considers the Russian universe of private investors to be wider than in the West. These private investors are not traditional LBO shops, but include hedge funds, venture capitalists, asset managers with private equity “arms,” and in particular, oligarch industrialists and their vehicles who have private equity concentrated in their hands.

This was quite nicely illustrated by this week announcement. Two co-sponsors: JER Partners, the global real estate investment arm of the J.E. Robert Companies, and Alfa Capital Partners, the Moscow-based private equity and real estate investment group affiliated with Russia’s Alfa Group, announced the final closing of the Marbleton Property Fund. The Fund will focus on investments across all property sectors in Russia and Ukraine and will purchase existing properties as well as participate in development. The European Bank for Reconstruction and Development is an anchor investor in the Fund. Other limited partners which have invested include institutional and private investors from around the world. Marbleton has completed agreements for transactions in Moscow and St. Petersburg and has several transactions under exclusivity. The Fund was commenced in 2005 and since that grew from $ 200 to $321 million.
Raiffeisen Investment AG and Lazard Ltd (NYSE: LAZ) announced a joint cooperation agreement for merger and acquisition (M&A) advisory in Russia and the Central and Eastern European (CEE) region. This is beneficial for both sides: Lazard is receiving “the key” to Russian market and Raiffeisen Investment hopes to boost its activities, which so far are really modest (for 1H 2007 it has deals of $ 150 million). According to the Announcements the new joint venture would look into the deals of at least $ 200 million.

RBS and Renaissance Capital Bank to establish Russian JVRoyal Bank of Scotland (LON:RBS) and Renaissance Capital Bank are planning to jointly establish an investment bank in Russia. The bank will be owned 50/50 and is expected to commence operations by the start of 2008.

Russian IPOs - Review of 11th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED MARCH 15-17, 2007

Russian Stock Market - IPOs

Recent world stock market events lead to more discussions on the Russian stock markets and IPOs in the Russian press. Agency of Political News in a lengthy commentary on March 9 argues that the stock market in its classic definition does exist in Russia. The author notes that basically there are no private investors – in 2005-06 they counted only 3% of the equities of Russian issuers. Thus there is no actual money from population in the stock market.

NOTE. Just for information, here is the data on the growth of transactions on MICEX:

Private individuals ARE there

Furthermore, the commentary cites well-known numbers that 95% of all market turnovers are made by 10 top leading companies. Well, remembering Mark Twain (There are lies, damned lies and statistics), and the fact that we may use this any way we like, I guess there is truth in everything. However, I think that the commentary is extremely sly regarding IPOs. Citing the statistics on Russian IPOs it states the reasons why Russian IPOs are prevailing in the West, not domestically:

(a) While listing outside the country it is very convenient to hide the volumes and money raised and do not attract attention. Every professional knows that this is not true.

(b) There are insufficient resources on the Russian stock market and the investors are reluctant to disclose that they have money. Maybe partially it is true, but it is well known reality that here in Russia we DO have money, but the question is universal – where are the quality products? Just an illustration – what about 2006 results of domestic IPOs - $ 459 M for Raspadskaya, and $ 368 M for Magnit. This is a bit controversial issue. Market Watch in its report on March 9 quotes Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow. "Basically, there's not enough money. There are around 1,200 banks in Russia and most of them are very small. That makes it almost impossible for them to lend billions of dollars."

(c) It is very handy to sell the Russian company via its foreign “daughter”, and the money this way is grounded in a handy location much quicker. Once again, it is half true. According to RTS data in 2006 there were 16 domestic IPOs in Russia, as to foreign - 8 IPOs of Russia-domiciled and only 5 of foreign-domiciled Russian companies.

 That’s so much about APN piece. Back to the quoted Market Watch report. It cites Martin Cocker, a senior partner at Deloitte in St Petersburg, that there could be as many as 700 or 800 companies in Russia and the former Soviet Republics hoping to go public in the next few years. “While there's life, there's hope” - noted Cicero. But these numbers in my opinion are way too optimistic. Everyone here agrees that there are about 60 companies in Russia mulling IPO this year, let’s assume that “the next few years” will be three, thus we’ll get about 200; there is no way that former Soviet Republics will make the difference. Other interesting numbers were reported this week by the headhunting group Heidrick & Struggles study: more than 100 Russian businesses report they are considering or preparing for IPO, with 40% of them contemplating a flotation overseas. These numbers are easily obtained from numerous IPO-related Web-sites that are proliferating in the RUNET (Russian Internet). For example one of them lists more than 120 companies, but these are in majority the ones that declared their intentions. I think, the UFG’s estimate of 60 is more realistic.

While reading this Market Watch story I had a very strong feeling that this is a latent LSE AIM advertizing effort. AIM is good, but what about the other junior markets?

In the last year we witness here a strong competition between these alternative investments markets. More than a year ago, no one ever heard about Euronext. Now at every conference or show at least somehow related to IPO we have a presence of the same team: AIM, Euronext, Deutsche Boerse; and quite recently - the people from Hong Kong and Singapore Exchanges (!). That means that very soon we will witness real competition (like the story on a ‘war-zone’ between the Warsaw and London stock exchanges, described by our fellow blogger). According to some reports Euronext is very actively taking part of AIM’s pie (especially with small- and medium-sized enterprises - SMEs), and with advent of the Asian guys we will see some interesting rivalry that eventually will benefit the Russian companies.

 

And strange as it seems, we do not see Canada's TSX Venture Exchange (TSX-V) here. We have learnt this week astounding story of TSX-V smashing success. Since the beginning of 2002, the major American indices have posted modest gains. The Dow Jones has tacked on 22.5%; the NASDAQ and S&P 500 have gained 22.3% and 22.2% respectively. But TSX-V claims a 202.5% increase!!! Alongside with this, some of the individual companies on the TSX-V have posted fantastic results:

• CV Technologies Inc. - a gain of 9,301.3% in under three years;
• Energy Metals Corp. - a gain of 5,858.3% since September 2003;
• Laramide Resources Ltd. - a gain of 7,403.1% since May 2004;
• Exxel Energy Corp. - a gain of 7,217.7% in under a year

 I think that we will see some people from Toronto in Moscow very soon, if they would not be too pre-occupied with their success.

Another research report that gained commentaries in the Russian press was the headhunting group Heidrick & Struggles study. It notes that the Russian companies floating on international stock exchanges raise 20% less than Western counterparts because their standards of corporate governance are lower. Further on it shows that investors would pay up to 38% more for shares in Russian companies with good corporate governance. This is an extremely good argument for some Russian entities engaged in corporate governance, like Russian Institute of Directors or Institute of Corporate Law and Corporate Governance .

Euronext – another harbor for Russian IPOs?

Euronext is speeding its efforts in trying to get the Russian companies listed. This month we will see two appearances of its executive at two conferences in Moscow. What I see as the most attractive factors for Euronext IPOs are:

- No restriction of float value (like 20% in LSE)

- Companies listed on Euronext under GDR programs and other depository receipt programs are included in the market's index

- Alternext as a viable place for small- and medium-sized enterprises (SMEs)

Nomura, Merrill Lynch – more news

Nomura Holding announced the opening of its Russian office. This is a rather limited structure, staffed with 5 investment bankers, that shall not provide any investment banking services. According to the office director Nomura in Russia shall provide IPO advisory services and serve as an intermediary between Asian investors and Russian companies. Market experts think that it may take Nomura up to two years to create a comprehensive investment banking entity in Russia. Another big player in international markets - Merrill Lynch – got its broker/dealer license from the Russian authorities. This is rather unusual development for an investment bank, according to a number of Russian experts. Similar to Nomura, Merrill Lynch maintains their representation office in Moscow since 2004. Instead of waiting for a rather long time to get a comprehensive banking activity license, the company decided to get the broker/dealer one, which is a tad easier process. Russian market experts think that Merrill is targeted towards institutional investors and wants to find some big borrowers in the country, thus competing with Deutsche Bank and Morgan Stanley. However, they note that this is tedious task. Goldman Sachs, Lehman Brothers are already in Russia for a while and have their licenses, but they are not exactly visible. They also cite the fact that Merrill will need to have at least 100 investment banking experts; while it took about a year for Morgan Stanley to arrange their team of 70.

SBERBANK

Lots of commentaries in media are about SBERBANK “popular” IPO. Newsmen learned about the management directive that obliged personnel of each of the branch to buy 2 shares at the price of 89,000 RUR. This is ridiculous considering the average salaries. As one of the readers comments on the Internet, five employees had to pool to buy just one share. SBERBANK’s management strongly denies this. But VEDOMOSTI daily notes that there are 242,000 employees in SBERBANK, and the official statement says that there were 46,000 individuals that subscribed. So, everyone wonders – how many employees contributed to 46K?

First Direct Investment Fund Arrives in Russia

This week there was an announcement that one of the biggest direct investment fund - TPG (Texas Pacific Group) – came to Russia. Although some other big players (like Goldman Sachs Capital Partners, CVC, Permira, Apax) are contemplating working in the country, TGP is in reality in here. The news got mixed reaction from market professionals. TGP wants to invest billions of dollars, but companies of that magnitude are scarce, unless TGP wants to be involved with some government-owned ones. But others argue that Russian oil and gas, media, IT and financial sector companies may get a piece of pie.

Russian Food Retail Sector

The process of consolidation of Russian industries is continuing – this time with the advent to the country of Carrefour, the second-largest food retailer worldwide. The analysts think that major Russian hypermarket chains (O’Key, Lenta, Karusel) are the prime acquisition targets in M&A process. Initially Carrefour starts with three sites in the Southern part of Russia (Rostov and Krasnodar), but eventually may grow to 70-80 within 3-5 years. There are three big publicly traded retailers in Russia - Seventh Continent, Magnit and X5 - all of which are trading at 30-times earnings. And these numbers make investors very cautions. This was spelled by Bill Browder, the manager of Hermitage Capital at the recent Adam Smith conference in London: "How are you going to make money from a company that is trading at over 30-times earnings? I don't know." X5 is trading GDRs at LSE, Magnit and Seventh Continent – in domestic markets. And the number of public companies will grow too. This year four more players announced their plans for IPOs – Patterson, Dixie, Lenta and Victoria.

Foreign Investments – What They Mean for Russian Business

PricewaterhouseCoopers released the results of the poll of management of 51 Russian companies from the Forbes-200 list. The questions were related to various aspects of business. What concerned the foreign investments is as follows:

- 77% think that foreign investments are important for expansion of international and regional presence

- 48% - for getting access to innovative technologies

- 34% - to manage political risks

- 17% for exit from business.

New IPO Candidates

- SEDMOY KONTINENT – 25% float at LSE – 2008

- Regional Alliance – a new ambitious project of TROIKA DIALOG – in 5 years from now, after completion of M&A processes with the regional insurance companies, get 20% of the Russian insurance market and IPO

- KAMAZ truck factory moved its IPO till 2009

- Fesco container shipping firm delayed it LSE IPO till 2008

- RESO GARANTIJA insurance company – will announce their plans for IPO in May