IPO boom or not? Russia set its own IPO record in 2006.
Offerings.ru, which provides professional information support to Russian and CIS companies wishing to conduct an IPO, said 23 Russian companies conducted flotation last year, raising $17.74bn, compared with 13 and $4.5bn in 2005.
This is a clear growth tendency. Analysts with Offerings.ru expect the volume of Russian IPOs to reach, or even exceed, $25bn in 2008.
A forecast for net capital inflow was upwardly revised to take into account the growing number and volume of initial public offerings. The Russian Central Bank has doubled its forecast of net capital inflow from $35bn to $70bn in 2007. This makes one wonder if the growing IPO volume and capital inflow are a tendency or a passing fad.
At first glance, this is a positive development, but there are alarming elements involved. Experts said about the IPO boom last year that such offerings are not the best way to raise funds, and that the popularity of IPO was due largely to political reasons.
Russian companies that emerge on global markets need government protection, or at least an official record of their market value to reinforce their bargaining positions.
One more specific feature of Russian IPOs was registered in 2006: according to the Statistics Service (Rosstat), only 14.7% of the funds raised through IPOs was invested in fixed capital. However, the situation seems to have changed in 2007.
Fewer but bigger Russian IPOs are mainly large and far between. The record figure for the first half of the year, according to Thomson Financial, was mainly ensured by ten companies (14, according to Offerings.ru), while 90 companies floated their shares in the US and more than 60 in China (Thomson Financial).
As long as such financial behemoths as Rosneft, Sberbank and VTB conduct IPOs, the Russian market will register impressive results. However, it may not repeat its 2006 achievement, which is why the Central Bank expects only $40bn in capital inflow in 2008, $45bn in 2009, and $55bn in 2010. These figures are larger than previously expected, but smaller than the 2007 result.
A decade ago nearly all the Russian issuers looked exotic to foreign businessmen, in part because very few Russian companies dared to float their stock. But as a Russian saying goes, Russians take time to tackle up their horses, but ride fast.
Russian businessmen spurred the issuing market so quickly that the number of IPOs now doubles every year. According to analysts with the business newspaper Kommersant, there were more than 15 public offerings in 2006, which raised over $17bn, but this year nearly 60 companies have filed IPO requests, expecting to raise as much as $30bn.
IPOs were the toy of investment bankers, mainly foreign ones, only recently, but now big, small and mediumsized Russian businesses, as well as government officials and even common Russians, are ready to contemplate buying stock during an IPO. Everyone in Russia wants to know about IPOs or take part in them. The IPO boom is rolling across the country.
The dynamics of that segment of the stock market is easily tracked from the end of 2006. In November that year, Russian President Vladimir Putin met with foreign investment bankers in the Kremlin. He summed up the results of the year and thanked the bankers for investing in the economic development of Russia. Putin said he was satisfied that the capitalisation of [state-controlled oil company] Rosneft went up from $80bn to $92bn following its IPO, and hinted that the Russian government and business community were prepared to continue working for such goals.
Time confirmed the seriousness of the government’s intentions.
The information that several Russian companies intended to float their stock in a bid to raise up to $4bn within a year stunned the market in November 2006.
The figure looks less than modest compared to the $30bn they plan to rake in this year.
That same November, electricity holding RAO UES announced the results of the flotation of its wholesale generating subsidiary, OGK-5, the first company to spin off the holding during the electricity reform. The news proved that Russians underestimate their worth: strategic and portfolio investors fought tooth and nail for the package, which was nominally valued at 9 cents per share. The result was viewed then as a clear success.
What now? Next on the agenda is a series of IPO by generating companies. Flotation by OGK-5 will be followed by the IPO of other wholesale and territorial generating companies (TGK). In general, thermal generation is receiving more private investment now, including through IPO.
The demand for electricity stock is growing almost exponentially. Last year electricity securities cost an average of $200 per KW, but OGK-5’s IPO sent the price up to $350 ($600 per KW for OGK-3).
Energy companies formed as part of the reform of RAO UES are highly respected borrowers on the global market, on a par with oil major Rosneft and energy giant Gazprom. Gazprom and Rosneft’s demand for borrowed funds in 2007 has been estimated at $15bn-$20bn each, whereas the foreign banks’ limit set for all other large Russian companies is $25bn-$30bn (electricity producers account for a substantial part of the latter sum).
Despite a long pause on the Russian stock market, the shares of leading Russian companies were rated very high in mid-July. Gazprom is traded for about RUR270 ($10.6, or €7.8) per share, Rosneft RUR208 ($8.2, or €6.0), RAO UES RUR35 ($1.4, or €1.0). The stock of Russia’s largest private oil company LUKoil was sold for more than RUR1,950 ($76.4, or €56.1 per share), metals giant Norilsk Nickel’s for about RUR5,400 ($212, or €155), and the largest state-controlled savings bank Sberbank was traded at above RUR100,000 ($3,917, or €2,879).
The huge difference between their prices does not mean much, as it hinges on the initial nominal price per share.
Besides, Sberbank has already split its papers by 1,000 times in order to attract more small investors.
On the other hand, IPOs are held not at nominal, but at current market prices, which have long increased manifold from the nominal price.
The Russian banking sector, which used to keep in the shadows, has snatched the IPO initiative. However, the record figures in that sector were mainly ensured by the flotation of Sberbank and VTB, state-controlled banks that do not need the IPO security or protection from their main shareholder, the government.
Bankers outpace generation sector… Many analysts have noted a new positive trend in the first quarter of 2007: 90% of the IPO volume comprised funds attracted directly by companies, rather than their shareholders. In January-March 2006, companies accounted for less than two-thirds of funds raised through IPO. The trend promises an improvement on the Russian IPO market, with the bulk of raised funds to be invested in development, rather than distributed among shareholders, which can provoke inflation hikes.
The banking sector has long been snapping at the heels of the energy, oil and gas producers, becoming increasingly attractive for foreign and Russian investors.
According to Vasily Titov, a senior specialist with the state-controlled foreign trade bank VTB, the sector’s annual dynamics is 35%-40%, and the banking stock is gaining weight.
After a large-scale IPO of Sberbank in March (RUR230.2bn, or $9bn/€6.6bn), which market analysts unanimously praised as a major success, the bank’s managers admitted that its securities, floated at RUR100,000 ($3,917, or €2,879) per share, were not convenient for investors. They proposed splitting each ordinary share into 1,000 shares and each preference share into 20 shares.
VTB began selling its stock on Russian exchanges in early June. The Central Bank has registered a report on the results of the issue. VTB, Russia’s secondlargest bank by assets, floated during the IPO an additional issue amounting to 22.5% of its authorised capital, raising $8bn at 13.6 kopecks per share.
On the first day of the flotation, experts calculated that VTB shares would soar to 5% on the Moscow exchanges, and they were later proved right. Market analysts said that in July the exchanges would trade not only in VTB shares, but also in their futures.
The bank’s IPO became the world’s largest flotation by a lending organisation in the volume of depositary receipts.
…And make forecasts Analysts with Alfa Bank have calculated that Russian companies raised $25bn on stock exchanges, including $12.2bn outside Russia, this year. They predict that the sum will exceed $36bn by the end of 2007 – without revenues from the sale of strategic stakes in power generation. With them, returns from the flotation of new issues may reach $60bn.
Russian companies have raised $25bn from the flotation of new issues and $8.6bn from the sale of strategic stakes in power generation this year, despite the negative inflow of capital into emerging markets and a generally flabby market situation.
Chris Weafer, the chief strategist of Alfa Bank, said that if market revival continued into the second half of the year, the IPOs planned for that period would be easier, and the aggregate sum raised could be larger, because several more companies are planning to float.
Experts note that the profitability of shares the four state-controlled companies issued during their IPOs was nearly double the dynamics of the RTS index for the said period.
The forecast that generating companies would offer stock investors new shares worth about $10bn in 2007 has not materialised. Strategic investors snatched the four floated stakes, and they are also expected to buy the majority of the 13 issues planned in the second half of the year, as part of Russian and foreign companies’ strategic investment in the sector.
Analysts believe that the volume of issues in 2007 will total $25bn.
Waiting for profits President Vladimir Putin said during a regular meeting with Economic Development and Trade Minister German Gref, when the minister reported on the results of the public-oriented IPOs, that the government should develop that success by planning new flotation for private investors.
Putin said he believed Russians would like to buy the shares of rail monopoly Russian Railways, the largest Russian diamond producer Alrosa, and the Svyazinvest state telecoms holding.
However, state-controlled and semi-state corporations do not promise big dividends to their private shareholders. Gazprom, which has not held an IPO, paid a record sum of dividends, RUR600bn ($23.5bn, or €17.3bn), in 2006, while Rosneft, which had gone public, gained only 0.3% in the past 10 months, with RUR1.33 per share in dividends.
The future of Rosneft, as well as of many other companies that conducted IPOs to attract minority shareholders, directly depends on the ability to prevent the shareholders from panicking and selling their shares. They must convince their new shareholders to look into the future, which promises high dividends from the eventual growth in the capitalisation of public-private companies.
