Russian IPOs – Review of Week 24 of 2007

THIS POST WAS ORIGINALLY PUBLISHED JUNE 17, 2007

Russian IPOs – Review of Week 24 of 2007

Investing in Russia – the Word Battle is Going On
 

Over the past week there were a lot of discussions valuating the three-day St. Petersburg International Economic Forum, RIA NOVOSTI reports that 8,966 people from 65 countries registered for the forum, with 9 presidents, 40 ministers, 40 ambassadors and luminaries such as James Wolfensohn, Yegor Gaidar and Francis Fukuyama in attendance. And the business outcome was rather impressive - contracts worth $13.5 billion were signed between Russian and international companies, including a deal between Aeroflot and Boeing. As the follow-on to the Forum, the Federal Statistics Service published this week a report on the Q1 2007. Russia’s economy expanded in the first quarter at the fastest pace in six years as production of building materials increased to keep pace with a construction boom and consumer demand remained strong. GDP rose at an annual rate of 7.9% in the period, compared with 5% Q1 2006. Industrial output increased 7.9% (4.1% in Q1 2006).
I posted earlier on the hot “Investments in Russia” issue, and here is some more to it. President Vladimir Putin had behind closed doors meeting with over 100 foreign business leaders. In his remarks the President called for investment into shipbuilding, aviation, high technology and other sectors. In general, many attendees of the Forum voiced positive commentaries, and I think that one of them is of an interested in a view of my previous posts - by Daniel Thorniley, Senior Vice President at the Economist Group: “Business in Russia is the best-kept secret in the world. More rubbish is written or spoken about Russia than any other country on earth.” He also accused the media (like The Wall Street Journal and CNN) of scaring foreign businessmen into thinking they will be murdered in Russian hotels and see their companies seized by the Russian mafia. A few days later a major article appears in the Newsweek International that says: “Russian President Vladimir Putin is in the world's doghouse because he does not appreciate sanctimonious lectures or missile batteries on his border. He and President George W. Bush patched things up a bit at the G8 summit last week, but the tension remains. Ironically, we as investors should be grateful. As a result of this alleged increase in political risk, the Russian stock market and its oil stocks in particular have been falling even as both emerging markets and energy equities have climbed. After a week in Russia, I am convinced there is no business reason for this stumble; it's all about the media rhetoric.”A very good illustration to all these discussions is the report on Neptune Russia & Greater Russia fund. Almost 90% of all analysts recently point to the “lackluster performance” of the Russian stock market since January this year. Neptune's Robin Geffen has a good commentary on this: he believes the current dip provides an excellent buying opportunity as proved to be the case a year ago. Mr. Geffen notes that the Russian markets often follow the pattern of a strong first quarter, a correction in the second, a consolidation period in the third and another stronger period at the end of the year. And this year that history is repeating itself. Another interesting feature is that Neptune Russia & Greater Russia fund shifted its focus to consumer sectors over a year ago and significantly reduced exposure to energy. The fund has maintained its consumer exposure and as at the end of April, it had 22.4% in consumer staples with 19.3% in energy, 16.6% in telecoms, 12.4% in materials, 9.6% in financials, 8.4% in utilities, 6.4% in cash, 4.8% in industrials and 0.1% in consumer discretionary. Mr. Geffen says: "The fund continues to benefit from the widespread misunderstanding of the Russian market. Historical perceptions of the Russian stock market being resource-led are no longer accurate."

And of course, the major highlight of the past week is the survey, results of which are published by Clifford Chance law firm. The Economist Intelligence Unit surveyed 455 executives around the world in April 2007 about their perceptions of the challenges and opportunities they face in doing business in Russia. Some 40% of the respondents are based in Russia, and the remainder evenly split between respondents from Asia-Pacific, North America and Europe. They come from a wide range of industries, and approximately 65% of respondents represent businesses with annual revenues of more than US$500m. You may download the survey at the link, but I just want to pinpoint to some results:

- When asked about the profit growth potential of the Russian market over the coming two-year period, 54% of respondents called it “high” or “very high”.

- In a number of areas, American firms appear significantly more sceptical than their global counterparts about the Russian market.
- There is money to be made in Russia: Respondents were very bullish about growth prospects, both in absolute terms and also relative to other major markets around the world.

And just one table. This shows the difference of views between operating and trading in Russia and those who are not.

Vivid Illustration – US Chickens to Come to Russia
A U.S.-based supplier of broiler breeding stock and technical expertise for the chicken meat industry is in Russia. This week we learnt that after two years of extensive efforts to enter the poultry industry in Russia Cobb-Vantress is sending its first shipment of poultry breeding stock to the country. A new business alliance with Russian poultry distributor Broiler Budeshego (that is a subsidiary of the US firm Stromyn Breeders, LLC). "This is our first strong move to establish our brand of birds as a major breeding stock in the Russian market. Broiler Budeshego is a local Russian company who will widely distribute our stock throughout the country," said James Young, vice president of European and South American divisions of Cobb-Vantress. Budeshego is constructing a new farm and hatchery complex near Moscow and is expected to produce 2.5 million chickens initially, increasing to more than four million once in full operation, according to the Cobb-Vantress press release.

And More Prospects for InvestorsResearch and Markets published their Russia Food & Drink Report Q4 2006. Russia’s broader consumer market is clearly booming. The report significantly upgraded the total value estimate and forecast growth scenario for the Russian mass grocery retail (MGR). The MGR market should hit $17.45billion for full-year 2006, growing to $39.76 billion by 2010, with an average compound annual growth rate (CAGR) of 23.3% over five years. Local discount giant Magnit is gearing up for an IPO and launching a trial run of a new supermarket chain to cater to wealthier regional consumers. Emerging local players such as Lenta and international firms Auchan and Metro are expanding in local markets as well. The food sector is also prospering, with local players such as leading food manufacturer, dairy and beverage producer Wimm-Bill-Dann, restored to profitability growth in the large part due to booming regional markets. Internationally-backed players, such as leading brewer Baltika are benefiting from both regional growth and strong margins driven by higher sales of premium brands. The report summarizes that Russia offers massive growth potential through and well beyond 2010.

Newcomer to the Russian Banking Market

Every week we learn about more and more foreign banks coming to Russia. Earlier I mentioned about Barclays PLC. Now it is time for Chinese ICBC. Some time ago the bank announced of its plans to extended operations in Russia and focus on corporate banking. It applied for the license in 2005 and was expecting to start operations in 2006. Now it comes to 2007 reality – since February the recruiting campaign is under way. Everyone remembers its biggest IPO of $ 22 billion last year. With its 355,000 employees worldwide the bank may easily start operations in Russia, but many experts point to the fact that it is required at least three years to roll out to full scale operations in Russia.

Investment Banking is on “War for Talent”

Related to this new item is the issue of qualified personnel. I wrote quite a while ago, that in order to operate efficiently in Russia any company, banks including, needs to have a team that is nicely seasoned with domestic personnel. And that is the question. Let us look at the latest announcements and events. Of course this week everyone was stunned with the news that JPMorgan Moscow allured the whole analytics team from MDM Bank, including its Head. This is a good illustration of what is called here in Moscow as “the war for talent”. There is a huge deficit of experts in investment banking, primarily in the top managers’ category. And it is increasing day by day. In March this year there had been 35 rotations in investment banks in Moscow – twice as much as compared to 2006. As an example Nicholas Jordan, co-head of Deutsche Bank's investment banking business in Russia, left in March after 11 years with the company to run Lehman Brothers Holdings Inc.'s new Moscow office. Expansions of business of the Russian firms plus announcements from Western banks add more fuel.
Goldman Sachs Group Inc., wants to add about 25 bankers to its Moscow office to keep pace with rivals including Morgan Stanley. Barclays PLC this year plans to open a Moscow office and “quickly'' expand it to 200 people. We may also remember banks from Japan, China, Cyprus, as well as plans for Toyota and Ford to open their banks. Of course each bank may bring its own staff to Russia, but they would definitely require local experts too. I personally was involved in this “the war for talent”. What I found out that most of the graduates of Russian prestigious financial colleges are already for 1-2 years employed by the Western financial institutions (and by the way, their salaries are very good for the students). And some of employees at my present company are being approached by the rival competitors too. But the issue of finding qualified staff will be hot for another 3-5 years. Young investment banking neophytes will take some time to mature. And it was illustrated by news this week. Kostroma’s Sovcombank and Novosibirsk-based ARKA Finance group, owned by Dutch TBIF BV, have set up a holding with $400 million in assets to develop retail banking in Russian regions. Market participants call it a good idea but add that it may work out not as fast as expected due to the lack of skilled employees in regions as well as in Moscow.

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