Poster highlighting the PBN Company's Moscow "brain trust"

2006 - "The Year of the CIS IPO"

The PBN Company recently released its IPO Pioneers-2 report. The report describes 2006 global IPOs in general - Russian companies raised over $17 billion, and other companies from the former Soviet Union raised over $4 billion by listing their shares in Moscow, London, New York, Frankfurt, Almaty and Warsaw. The report provides key data and analysis on 18 Russian and on 11 additional Commonwealth of Independent States IPOs from Kazakhstan, Ukraine and Georgia. "If 2005 was the 'Year of the Russian IPO', then 2006 should be named the 'Year of the CIS IPO'," stated PBN's Chairman & CEO Peter Necarsulmer.

Whereas 2005 was characterized by an influx of consumer goods companies coming to market, by the end of 2006 it was all about diversification - with IPOs ranging from telecoms and media (2), food and agriculture (4), metals and mining (7), property and development (3), pharmaceuticals (1), energy (7), retail (1) and financial services (4).

Current forecasts for 2007 are even more bullish than they were for 2006. "There is no evidence to support the previously held view that the IPO market will taper off in the run up to Parliamentary and Presidential elections in Russia," Necarsulmer continued. A recent Renaissance Capital report predicted 43 IPOs from Russian companies raising a combined $31.24 billion. It also includes three more Russian banks in 2008: MDM-Bank - $500 million, Alfa-Bank - $500 million, and URALSIB Financial Group - $300 million.

This previous news item was unexpectedly commented upon by Bank of Russia Deputy Chairman Konstantin Korischenko at the 3rd Annual Russian IPO Congress. Mr. Korischenko pointed out that recent IPOs had demonstrated that there was strong foreign investor interest in Russian companies, specifically in the banking sphere. Korischenko added that IPOs of Russian companies have contributed to an upsurge in demand for rubles and higher capital inflow. However, he said that this created additional problems for Russia and a situation of uncertainty, as the Russian market was closely following developments in global markets. Meanwhile, those markets were unstable due to economic and political problems in the U.S. and Europe.

Russian Mergers & Acquisitions

M&A activity in Russia grew by 41% last year compared with 2005, to hit an all time high of $71 billion, according to a report from Ernst & Young. Acquisitions of Russian companies came close to totaling $60 billion, while Russian companies (Rusal, Evraz, Novolipetsk Steel, and Norilsk Nickel) spent over $11 billion buying foreign companies. Although the total number of deals involving Russian companies dropped by 10% in the last 12 months, the volume of the average deal was larger, coming in at $163 million - an 86% increase.

For the first time, oil and gas did not lead in value terms, being overtaken in 2006 by metals and mining. Financial services, media and retail were other sectors that saw a strong showing, the report continues. The trend for Russian mobile operators to expand their networks to cover other CIS countries through acquisitions is also noted. Speaking about the banking sector, the number of transactions increased from 78 to 99 with the volume of $ 4.8 billion – this was reported by the website Mergers.ru. The biggest one was the acquisition by French investment bank Societe Generale of 20% of Rosbank, valued at $ 634 million. In another interesting announcement, Russia's leading investment bank Renaissance Capital has purchased a bank in Africa and hopes to be the first Russian bank to break out of the traditional stamping grounds of the former Soviet Union by conquering these new emerging markets.

Russian Railways President Vladimir Yakunin at the Russia World Economic Forum in 2005

Russian Railways – A Juicy Investment?

Russian Railways plans to attract $2 to $4 billion through its subsidiaries. This week Russian President Vladimir Putin discussed railroad development with his top cabinet ministers. The plan initially calls for establishing a single subsidiary to attract between $2 and $4 billion in capital. After evaluating the success of the first company, another one could be established.

President Putin announced that it would be necessary to establish Russian Railways subsidiaries, which could enter the stock market later on to increase the parent company's capitalization. "Private capital should be attracted (to the railway industry) and public-private partnership projects should be stepped up.” Russian Railways President Vladimir Yakunin mentioned that a cargo transportation subsidiary is expected to raise at least U.S. $2 billion in an initial public offering.

The MICEX Success Story

In the first three months of 2007, the total volume of exchange-based trading in all of the MICEX Group’s market amounted to 16.45 trillion rubles ($626.2 billion U.S. dollars), 1.8 times more than in the first quarter of 2006. The exchange-based corporate securities market demonstrated the largest volume of trading and the highest rate of growth. Its share in the total exchange-based turnover of the MICEX Group grew to 47.5% over 33.6% in 2006. At present, the MICEX Stock Exchange organizes trading in 989 securities from 620 issuers; while 237 securities from 144 issuers are listed. Since the beginning of 2007, the number of securities traded on the MICEX SE has grown by 2.3%, while the number of issuers whose securities are admitted to trading has grown by 5.6%.

The Exchange has established its own alternative investment market - the Sector for Innovation and Growth Companies (the IGC Sector). Its accredited listing agents help new issuers enter the exchange-based market. Today, 595 entities participate in trading on the MICEX SE. Of them, 484 are admitted to trading, including 284 credit and 198 non-credit organizations. They serve 315,000 shareholders, including 280,000 and 9,000 institutional investors.

Creating a Russian Pre-IPO Fund?

PIO Global Asset Management is mulling establishing a pre-IPO Fund that would invest in SME shares that are preparing for IPOs. One of the options is to domicile the pre-IPO Fund in Russia and legally form it in a closed mutual fund scheme. According to Russian securities laws, it is not permitted to form a Fund’s portfolio exclusively with the low liquidity shares. Thus one of the solutions would be to include some blue chips in it.

New IPO Candidates

Krasnoyarsk Nonferrous Metals Plant (Krastsvetmet), Russia's most important precious metals refinery – strong possibility of a future IPO

Pharmstandard, the country's largest drug maker – up to 40% stake float in London and Moscow

Nutrinvestholding, baby foods group to raise $150 million to $200 million during its IPO in the next few months.

X5 Retail Group – is considering an SPO

Volga Gas - gas exploration and production company – plans to list on AIM hoping to raise
$100 million.

Inter RAO UES, a Russian company that imports/exports electricity – IPO in 2009

KD Avia, Russian airline – IPO at the end of 2008

PAVA Agricultural Company – SPO in London very soon.

MIEL Real Estate, Russian real estate management company – plans to issue Eurobonds soon.

Reporting on the 3rd Annual Russian IPO Congress

Last week Moscow hosted the 3rd Annual Russian IPO Congress, which will be covered in my next Russia Blog post.

You can read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov, and do not necessarily reflect the views of the FINAM Investment Company. To read more Russia Blog posts about Russian capital markets, click on the finance section or type www.russiablog.org/finance in your web browser.