Russia’s iconic toy company Detsky Mir (Children’s World) closed the country's second-largest IPO in three years, selling one third of its shares for RUB21.1bn (€333mn) on Russia’s Moscow Exchange (Moex), it said on February 8.
The IPO values the company, which specialises in toys and children’s goods, at RUB62.8bn (€991mn), also making it the biggest IPO in the Europe, Middle East and Africa (EMEA) region so far this year.
Detsky Mir floated at the bottom of the price range at RUB85 per share when the order book closed in the evening of February 6. Credit Suisse, Goldman Sachs and Morgan Stanley were the joint global coordinators and bookrunners of the offering, with Sberbank CIB and UBS Bank also acting as bookrunners.
Investors will be watching Detsky Mir’s shares closely as most of the share prices from Russia’s IPOs in recent years are underwater. Notably the IPO of state-owned VTB Bank and Tinkoff Credit Systems, a leading privately owned interbank, are both trading well below their IPO prices.
There was a boom in IPOs in 2006 and 2007, but the number fell off sharply after the 2008 financial crisis struck. In the last three years the only signficant IPOs have been: United Wagon Company, which raised $180mn in April 2015; Moscow Credit Bank, which raised $238mn in July 2015; and oil minor Russneft, which raised $500mn in November 2016. Supermarket chain Lenta also raised $225mn with a secondary public offering (SPO) in March 2015.
Detsky Mir is owned by Russian conglomerate AFK Sistema, but the Russia-China Investment Fund (RCIF) and other shareholders, including the management of Sistema and Detsky Mir, all participated in the offering as selling shareholders, the company said in a press release on February 8. “Sistema will retain a majority stake in Detsky Mir, and the others will also all retain a stake post-IPO. No shareholders are fully exiting,” the company said.
Russia’s equivalent of the UK’s Hamleys, Detsky Mir is much loved in Russia. In Soviet-times, queues used to wind around the company’s giant flagship store on Lubyanka Square multiple times (bizarrely also home to the KGB and now the FSB Federal Security Service) in the run-up to New Year’s Eve. Parents would queue for days to buy presents for their children. Today, the recently restored building is an Aladdin’s Cave of goodies, though ownership of the building itself was transferred to state-owned lender VTB in 2008 because it was collateral on a debt belonging to Hals Development, another Sistema daughter company, that had gone bad. As part of the deal, Sistema retained ownership of the Detsky Mir brand and the growing network of Detsky Mir stores that have spread out over Russia.
The company plans to more than double the number of branches in the chain; it opened 200 stores in the last two years and plans another 250 new stores in the next three years to bring the total to over 700.
In the last two years revenues have increased by just under a third and profit per square metre has been rising steadily as management techniques improve. Indeed, the same story is being repeated across the Russian retail sector as the country’s leading retailers become ever more professional in the face of rising competition. Detsky Mir’s rising revenue bucks the trend in Russia’s retail overall, where turnover contracted last year by 3.5%.
Detsky Mir’s strategy has been to focus on run-of-the-mill children’s goods. In addition to traditional toys, which account for 35% of revenues, the chain is the go-to place for school clothes, shoes and stationary, as well as baby products. At the start of each term the stores are packed with families tooling up for the new semester and the store even has a line of smart jackets and frilly children’s dresses that are traditional for school kids on the first day of school in Russia. Through a 2012 acquisition, it also owns 45 Early Learning Center stores specialising in educational games and toys.
Children’s goods has been one of the fastest growing retail categories in recent years. In 2012, Russia briefly became the largest market in Europe for children’s goods, overtaking Germany with sales worth $11.3bn a year; market research at the time found that Russians are unusually generous when it comes to shopping for their kids. And despite the passing of the post-Soviet demographic peak in 2016, Russia remains one of the most fertile countries in Europe, although its replacement rate is still below the 2.1 children per family ratio to maintain a stable population size.
As the children’s goods market has been growing with a compound annual growth rate that is easily double that in the rest of Europe, Detsky Mir’s valuation has grown considerably. “The last equity investment made in the company was by the Russian-China Investment Fund (RCIF) in January 2016 that is part of the Russian state-backed Russian Direct Investment Fund (RDIF),” the company said in its statement. “RCIF acquired a 23.1% stake for RUB9.75bn, giving the company an implied total value of RUB42.2bn. Looking back a bit further, in 2012 analyst consensus valued the company at about RUB9.5bn.”
“This transaction comes on the back of a strong year for Russian equities. In 2016 the dollar-denominated RTS Index rose 52.22%, making it one of the best-performing markets globally. The RTS is up 69.29% in the last 12 months,” the company noted.
Meanwhile, the RDIF said on February 7 it will exit from its stake in Detsky Mir in three to five years. The RDIF holds a minority stake together with the China’s sovereign wealth fund in the Russian-Chinese Investment Fund (RCIF) that was set up in June 2012. RDIF head Kirill Dmitriev said: “We will sooner or later have to leave, because we have to show income for our investors, and we see such a horizon – three to five years,” he said in comments reported by Vedomosti.
According to Dmitriev, RDIF holds stakes in other retailers as well, including supermarket chain Magnit and Lenta. “Since our investments these companies have shown good growth, so we believe in the retail market and the market in general in companies associated with the growth of consumption,” Dmitriev said.
RCIF bought its stake in Detsky Mir a year ago and paid RUB9.75bn (€153mn) for a 23.1% stake in the company. The whole company was valued at RUB42.2bn at the time. During the IPO the RCIF reduced its stake to 13.1% to cash out an estimated €32mn.