Euronext moves east

By bne IntelliNews March 12, 2007

Ben Aris in London -

The European bourse Euronext has launched a campaign to capture a slice of the burgeoning Eastern Europe IPO business and is going head to head with the London Stock Exchange (LSE), which more or less monopolises this business at the moment.

Tough reporting restrictions introduced in the US following the scandals at Enron and WorldCom mean Russian companies have largely abandoned New York as a venue to float their shares. Euronext is late into the game, as the LSE has been the exchange of choice for Russian companies floating on international exchanges over the last four years.

Euronext has its work cut out if is going to win some of the $30bn-plus worth of Russian companies that have indicated they will float in 2007.

According to PricewaterhouseCoopers, in terms of the number of transactions in the fourth quarter, London continued to lead, with a combined market share for the main market and Alternative Investments Market (AIM) of 42% of all European IPOs. London attracted 12 overseas IPOs in all, including four from Russia and two from Kazakhstan.

However, London’s total market share of IPOs decreased from the 44% in the third quarter of 2006, and from 54% in quarter four of 2005, showing that Euronext is eating into London's lead in general. And it is now targeting that Russian segment in particular.

Aaron Goldstein, head of Euronext's business development, says that as the leading European bourse, Euronext is the natural venue for Russian companies wanting to come to market this year.

"For the investors, it is not an issue which platform a stock is listed on. They will follow the company wherever it is listed. For them the only issue is the company," says Goldstein. "The same is not true for the issuer as there are advantages and disadvantages between listing on the different exchanges."

Euronext was created from the merger of four stock exchanges of Paris, Brussels, Lisbon and Amsterdam in 2000 and companies can choose any of these markets to enter the system (Amsterdam would be a natural choice given that many Russian companies register their holdings in the Netherlands.

One of the exchange's advantages is that thanks to this pan-European structure, Euronext gives exposure to a wide range of Western European investors interested in the growth of the former Eastern Bloc countries that are becoming major trading partners and acquisition targets.

The exchange boasts Europe's largest order-book exchange and the second largest derivatives market through its tie-up with LIFFE with a turnover of €1.7 trillion a day.

On top of this, Euronext will complete a joint venture with the New York Stock Exchange (NYSE) this spring, giving its listed companies direct access to US investors.

"It is a merger of equals with both sides having equal number of seats on the board," says Goldstein. "Once the merger happens in April we will become the world's largest stock exchange – four-times larger than any of our competitors."

Euronext vs LSE

In many respects Euronext and the LSE are level pegging, with holding a 27% share of the European equity market capitalisation. Euronext is only slightly ahead in terms of market capitalisation with €3.045 trillion against LSE's €3.029 trillion. And both exchanges have a similar make-up of listed sectors, with Euronext boasting slightly more consumer-orientated sectors while the LSE has a bit more in the way of financial institutions.

Euronext leads the LSE in some respects. The average size of companies on Euronext is four-times bigger than on the LSE with average market caps of €4.2bn and €1.7bn, respectively. Also, Euronext beats the LSE in terms of trades and turnover last year with an average value traded each month more than twice that of the LSE: Euronext saw average trade value of €276m vs the LSE's €91m in September last year.

The launch of the campaign to attract Russian companies is part of Euronext's strategy to diversify its companies to include more international companies, which already account for a quarter of the stocks listed.

So far the exchange has attracted no Russian IPOs, but it offers many of the things that Russian companies are looking for. While the Russian state is keen to stop the drift of Russian companies away to other exchanges, even the head of the Federal Service for Financial Markets, Oleg Vyugin, admits that Russian exchanges struggle to absorb IPOs of more than $500m because the domestic pool of investors is simply not deep enough.

"For a really large-size deal, $1bn to $1.5bn, Russian companies will have to go for foreign markets because it's fairly difficult to raise an enourmous amount of money in Russia in one shot," says Alexei Rybnikov, the CEO of the Russian exchange MICEX.

And long-term institutional investors are well represented on the international exchanges, whereas the Russian bourses are dominated by speculative short-term investors, which make stock prices more volatile.

Euronext boasts the world's largest IPO: the floatation of France's Electricite de France, which raised €7bn with an IPO in 2005. And it counted a total of 142 new listings last year, which raised a total of €21.4bn.

Competitive advantage

Given the two exchanges are relatively well matched in terms of composition of the listed companies and depth of their pool of capital, Euronext will have to compete on the details of the regulation that govern listings and here it has a few clear advantages over the LSE.

First, the LSE insists that IPO companies can't commit more than 20% of their capital to a single investment project, whereas Euronext has no such requirement. Although in theory this restriction makes investing into LSE stocks less risky as companies are forced to diversify their assets, it also puts off certain types of company like real estate developers that typically have more concentrated investment portfolios.

Second, is the fact that companies listed on Euronext under GDR programmes and other depository receipt programmes are included in the market's index, whereas those that list these instruments on the LSE are not.

"We at Euronext do allow GDRs on the central order book as well as the indexes. That has great ramifications for the issuer," says Goldstein.

When a Russian company enters the LSE it is listed on the international order book alongside other GDR companies. When they enter this book the company tends to be targeting Emerging Market Funds, Russia specific funds of long-term hedge funds.

"A Russian company in this case is not targeting other investors and so are not followed by the general population of analysts," says Goldstein. "On Euronext, the company goes onto the central order book and is placed alongside its peers in terms of analysts, who will communicate with their investors and so the company gets a wider investor base and better liquidity."

It is an important distinction, as it means analysts at investment banks on the European continent have to pay attention to these Russian listed companies and compare them to their peers as their performance is included against the index; analysts in London are free to ignore the Russian companies listed on the LSE because the performance of the LSE index is unrelated to what is happening to these stocks.

Goldstein argues this inclusion in the index will force Western European investors to take positions in the Russian stocks to better compete with the index.


The sea of IPOs on the two exchanges' main markets is so deep that the extra Russian business won't make that much of a difference. However, the prospects of Russian firms making a bigger splash on the exchanges' markets for small- and medium-sized enterprises (SMEs) is real.

London's AIM has proved popular with many Russian companies such as gold mines and service providers. Last year, companies raised a total of $17bn on AIM, of which companies from the CIS accounted for $1.2bn in the form of IPOs and a total of $2.8bn through placements.

Euronext also has a junior market aimed at SMEs, which it launched in May 2005 in France before being rolled out on the other sister exchanges around Europe. Companies have to sell at least €2.5m worth of shares in a public offering (or €5m in a private placement), but most companies already listed on the junior market have a capitalisation of €10m-100m and are more concentrated in this range than on AIM, which has both significantly bigger companies with market caps over €500m and also those under €2m.

Euronext says it already has a good distribution of companies from a variety of sectors and 80% of IPOs on this exchange are bought by institutional investors from across Europe, which gives the stock prices solid support.

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