Russia Profits from the Worldwide IPO Boom
Director of Equity Financing, FINAM Investment Company, Moscow
The last era when Russia was an emerging market - an ad from 1914
Source: A Fistful of Euros blog
The UK Financial Times noted last week that we have seen a dramatic increase in initial public offerings from emerging-market companies this year. During the fist five months of 2007, the total money raised represents half of the volume for all of 2006. There were 268 emerging market IPOs which raised a combined $53.8 billion. That compares with this time last year when 184 IPOs had raised $25.6 billion. The paper cites three reasons:
(i) ample liquidity in the financial system,
(ii) a strong appetite for risk among investors;
(iii) growing demand for new equity from fast-growing companies.
It is really amazing -- just in nine days, three major IPOs have taken place: Russia's Vneshtorbank with $8 billion raised; a $1.85 billion offering by Halkbank of Turkey; and the $1.4bn flotation of Russia's Africa Israel Development Ltd.
Russian Businessmen Warm Up to IPOs
In light of this news, it is appropriate to note a small news item published by Russia's Finance magazine this week with the meaningful title: "The IPO Has Evolved into a Rather Sound Way to Cash Out". The author thinks that way back in 2003-2005, Russian assets were priced rather cheap compared to other emerging markets. At that time, the owners of major Russian businesses were reluctant to sell off their companies to investors. But by 2006, Russia's most successful businessmen understood that the market was ready to pay more, and that these prices could often exceed their expectations. Thus, IPOs surfaced as the best way to "cash out".
The article cites the PIK construction company as an example. The owners valued the company at $1 billion at the end of 2005, and now Deutsche Bank, Morgan Stanley and Nomura International believe that it is worth $11-14 billion. Even though the owners can lower the price corridor during upcoming placement, the price would still be well above their expectations. AFI's IPO is another very good example.
The State of the Russian Economy and Stock Market
In recent years there has been strong qualitative growth inthe Russian economy that opens new possibilities for investments. This point of view was recently expressed by Russian Minister for Economic Development and Trade German Gref, who made a speech at the annual council of European Bank for Reconstruction and Development (EBRD) governors in Kazan.
Throughout his tenure in office, Mr. Gref has strongly emphasized shifting the Russian economy away from overdependence on exporting raw materials. To be sure, most of the sectors of the Russian economy are developing efficiently enough. As an example Mr. Gref cited the development of the Russian stock market. This week the MICEX released some data that correlates with Mr. Gref's statement. It still remains the major Russian stock exchange (in 2006 MICEX had about 90% of turnover of all Russian stock market, compared to less than 10% for the RTS), therefore it is possible to assess the entire domestic market by taking a snapshot of the MICEX recent performance. In one year, trading volumes increased by 3.3 times, the investor base increased by 51%, with 48% of this increase coming from private investors.
As of May 1, 2007:
- 288 shares issued by 190 issuers are trading
- 583 bonds issued by 417 issuers are trading
At the same time there is a visible shift from trading in Russian ADRs issued to investors abroad back to buying stocks in Russia. Thus turnover of Russian ADRs on MICEX is 1.3 times of IOB LSE's turnover. That shows that world investor community is starting to look at Russia as one of the financial hubs of the world.
There was a lot of speculation last year that there were not enough private investors in Russia. Here is some data from the MICEX that shows a drastic increase in the last two years.
Former FFMS Director Lands at MDM Bank
This week the intrigue with Oleg Vyugin, former director of Russia's Federal Financial Markets Service, ended with the announcement that he will become chairman of MDM Bank. After Mr. Vyugin's resignation on May 10, there was wide speculation that he was going to join Goldman Sachs. However, the press reported that MDM Bank offered a better compensation package. MDM Bank is ranked among Russia's top 15 banks by assets.
Logo of MDM Bank
Even before Mr. Vyugin was officially approved by the bank's board of directors, he met with reporters on May 24 and noted that the Russian stock market may experience a sharp correction by the end of the year and then rise again. In Mr. Vyugin's view this is a positive development, similar to the correction that we experienced last summer, when after the market fell, more investors arrived. He also stated that the Russian stock market is unstable since February of this year and this has scared many investors off. The latest IPOs for Sberbank and VTB have added more volatility to the market.
Koltsovo Airport in Yekaterinberg
More Investment Opportunities in Russia - Airports and Timber
Kommersant Daily reports that the Russian Aviation Agency has drafted a strategy for developing Russia's airport infrastructure. According to this document, in the next several years Russia will have 121 major airports and 12 of them will be international transit points. Each of international hubs will host its own airline. It is estimated that by 2015 about 820 billion rubles ($31.676 billion) will be invested -- 64% is expected from the federal government, 33% from regional authorities, and the rest from private investors.
The Russian government is also discussing plans to introduce large incentives for investment in the country's vast timber industry. According to government statistics, in Russia timber supplies exceed the needs of wood product consumers by one-third. On an annual basis, Russian forests increase by 920 cubic meters while only 186 cubic meters are processed. The key question under discussion is whether investment projects worth more than 5 billion rubles ($193.147 million) would get forest leases without auctions and pay 50% of the rent or even no rent at all.
European Bank for Reconstructiona and Development Expands into Russia's Far East
As the result of the mentioned above meeting in Kazan the European Bank for Reconstruction and Development (EBRD) is going to open several offices in Russia and also expand its operations in Russia's Far East. In another development, it was announced that EBRD acquired a blocking stake in SKB Bank that is located in the city of Yekaterinburg in western Siberia.
Former GE CEO Jack Welch a Hit with Russian Businessmen
In my last post, I commented on the meeting hosted by the Skolkovo Moscow Business School with Jack Welch, the former CEO of General Electric. This meeting was well publicized in Russian mass media and attracted many prominent Russian businessmen.
It is interesting to note that the meeting was held in the restored historic residence of Russian Boyars (court nobility) where Ivan the Terrible once received the reports from his noblemen and often had them executed after the sessions.
Mr. Welch told his audience that the key to running a successful company was leadership, transparency, vision -- and beer. This was a Q&A session where the present listeners were able to ask any questions they like. "Russia, with its incredible wealth right now, the only thing it could do wrong is not use that wealth to expand globally," said Mr. Welch. He also reminded the audience about the well-known 20-70-10 ratio regarding personnel management and spoke about Mergers & Acquisitions and reverse mergers. One of the things that amused the audience was his statement that it is imperative to celebrate the victories of staff and to show appreciation. "In my early days, I'd bring a keg of beer in [the office] every Friday night".
Church's Chicken to Open Restaurants in Russia
Church's Chicken, the U.S. chain of fried chicken fast food restaurants, is coming to Russia. As is usual for the company in some countries it will open the new restaurants under the Texas Chicken brand. The first outlet will start operations in Moscow in August, the second one will open in St.Petersburg in September 2007. Church's Chicken envisions opening 30 restaurants within 3 years with investments of $20 million. Experts believe that to be successful the company has to hire quality Russian management; otherwise it may follow in the unsuccessful path of the Subway franchise chain that has struggled to conquer the Russian market since 1994.
New IPO Candidates
The Korston Group of companies plans an Alternative Investment Market (AIM) IPO for its main asset -- the Orlyonok Hotel Complex -- to be issued in 2008.
In response to a reader question about where they can find more information about financing new construction of Russian airport infrastructure, Mr. Kuznetsov posts this comment:
For this news item the URL is: http://www.kommersant.ru/doc.html?DocID=768571&IssueId=36287
Also, if you read Russian, there is some info on finances of Russian airlines at: http://www.b-online.ru/pdf/BFM_071(31-05-07)_small.pdf
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 are reproduced here solely for educational purposes. 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.