COMMENT: The Russian IPO market is back in business

By bne IntelliNews February 8, 2010

Angelika Henkel of Alfa Bank -

Russian IPOs and secondary public offerings (SPOs) are likely to pick up in 2010 on the back of the recovery on global and Russian equity markets. Announced and rumoured transactions point to equity issues of around $10bn-12bn.

This is unlikely to be a significant burden on the Russian market given its size and investors' appetite for emerging-market risk. The largest new entrants will come from the metals and mining sector, implying that Russia will remain a high-beta market mainly exposed to oil, commodities and base metals.

The global IPO recovery in 2009 largely bypassed Russia. Worldwide, the total volume of offerings in 2009 exceeded $105bn, mainly driven by Chinese companies, which accounted for roughly 50% of the total volume. In Russia, by contrast, only one minor IPO took place in December, that of Human Stem Cells Institute worth $4.8m. The only thing of note about this offering is that it was the first biotechnology IPO in Russia. However, given the small volume of the placement ($4.8m), we view it as a sign of investor interest in innovative companies rather than a sign of a recovery of the Russian IPO market.

Russian IPOs/SPOs are set to rebound in 2010. In addition to Rusal's highly publicized Hong Kong debut, there is a growing list of companies shooting for a 2010 IPO, including SUEK (iron ore), Metalloinvest, Prof-Media, Victoria (retail) and Tractor Plants. Including Rusal, the IPO volume could reach $8bn-10bn.

In addition, secondary offerings are likely to gain momentum. Among the companies expected to make cash calls are TMK, Petropavlovsk, Silvinit and a number of electric utilities. The planned size of the offering is not known in many cases, and in others (eg. the power sector), the state will take up a substantial part of placement volumes. Still, we assume that the total volume of SPOs could exceed $2bn. The figure could be much higher (by up to $5bn) if the CBR further reduces its stake in Sberbank to 50%, as its CEO recently proposed. However, we consider this unlikely in the near term, particularly because we do not see the budgetary necessity of such a move.

Additional demand for equity capital may come from a revival of privatization efforts. According to its privatization plan for 2010, the government anticipates raising up to $2.4bn through the sale of state assets this year. However, the list of assets is very heterogeneous and includes minority stakes in unlisted companies (for example, insurers) as well as controlling stakes in firms that are still on the government's list of strategic companies. In many cases, an IPO will not be possible or not be the preferred method of privatization. There is still a lack of information on which companies will carry out IPOs, but the list could include TGK-5, Rosgosstrakh, Ingosstrakh, Moscow Metrostroy, Iskitimcement and Tyretsky Solerudnik (Tyretsk Salt Mine). Also, provided they are withdrawn from the list of strategically important enterprises, the state may sell its stakes in Murmansk Commercial Seaport, Sovkomflot, Novorossiysk Commercial Seaport, Koltsovo Airport, Anapa Airport and Tolmachevo Airport, but again it is not clear whether an IPO or a trade sale would be the preferred method.

While the projected volume of IPOs and SPOs implies a significant increase over last year, it is still well below the amount of capital raised in 2006 and 2007. Given Russia's market capitalization of around $680bn and our favorable outlook for Russian equities, raising new equity capital in the neighborhood of $10bn should not put any pressure on the secondary market. At present, any uncertainty related to capital market transactions (as in the case of Rusal) seems to reflect company specifics rather than a general lack of appetite for Russian stocks.

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