Georgian Railway plans London IPO for May

By bne IntelliNews April 17, 2012

Clare Nuttall in Almaty -

Georgia announced plans to hold an IPO in May of state monopoly Georgian Railway on the London Stock Exchange, on April 16. The second privatisation attempt of the railway operator by Tbilisi leads a host of planned sales of stakes in major strategic companies in a bid to raise funds for infrastructure development.

An exact date for the IPO will depend on market conditions, Georgian Railway said. However, when the IPO goes ahead, Georgian Railway would become the first state controlled rail monopoly to list on the exchange.

Tbilisi plans to list up to 25% of shares in the company, with a statement from the Ministry of Economy and Sustainable Development saying that the IPO will be in the form of Global Depositary Receipts (GDR), Reuters reports. Citigroup and Goldman Sachs have been appointed as joint bookrunners.

The proceeds from the listing will be used to drive rail infrastructure development in the small nation. Georgian Railway has several major investment projects underway including a company-wide modernisation programme, the Tbilisi Bypass Railway and the Baku-Tbilisi-Kars railway, which will link the Azeri, Georgian and Turkish rail networks.

The company says that in 2012 it plans to invest GEL200m ($122m) on the Tbilisi Bypass Railway and high-speed railway project, GEL80m on cargo infrastructure, and an additional GEL60m on other projects including buying new passenger trains.

Georgian Railway has already carried out a five-year restructuring programme to transform itself from its Soviet roots into a modern, profit-oriented company. The company reported that revenue grew from GEL405m in 2010 to GEL489m in 2011, while operational expenses were cut by 2.5%. Net profit was up by 43% from GEL101.5m to GEL145m.

The company said it expects further profit growth in 2012. "We are already one of the very few railway companies in the world delivering profitable growth without reliance on government subsidy," Georgian Railway CEO Irakli Ezugbaia claimed in a statement. "Our IPO will now mark another stage in Georgian Railway's evolution, bringing greater profile and visibility to the value we are creating to support our long term expansion plans in the region," he added.

Unlike European railways, which typically separate their track and rolling stock into separate entities, Georgian Railway is a single integrated company in the style of American rail operators. The company is one of the lynchpins of the Georgian economy, being the country's largest employer and taxpayer. It employs over 13,500 people.

The lion's share of Georgian Railway's income comes from freight transport, with freight accounting for 95% of the $286m revenues earned in 2011. This is thanks to Georgia's location on the Euro-Asian Transportation Corridor between Europe and Central Asia. It is a key transit state between Azerbaijan and the oil producing states of Central Asia.

Georgian Railway is already a trailblazer for Georgian companies on the LSE, having issued its debut $250m Eurobond on the exchange on July 22, 2010. This was the first international corporate bond issue from Georgia, and has outperformed government bond issues. In December 2011, Fitch Ratings upgraded Georgian Railway to 'BB-, to reflect the company's strong links with the Georgian government.

The planned IPO will be the second attempt by the Georgian government to privatise one of its most lucrative assets. Previously, the government agreed to give the management rights to Georgian Railway to UK registered Parkfield Investments, but the deal fell through after just a few months. Parkfield was reported to be a front for either Georgian billionaire Badri Patarkatsishvili, who died in 2008, or a Russian investor.

The Georgian government is keen to push ahead with a new wave of privatisations in a bid to raise money for infrastructure investments. A new law allowing Georgian state owned companies to be listed on international exchanges was approved by the parliament in its first reading in September 2011. In addition to Georgian Railway, other assets earmarked for listing include power transmission company Georgian State Electric System, and Georgian Oil and Gas Corporation (GOGC), the operator of the main pipeline transporting gas from Russia to Armenia through Georgia.

While Georgia's sovereign bond issues, and Georgian Railway's previous Eurobond, mean that international investors are familiar with the country, concerns about political risks remain. Tbilisi has been gradually reviving investor confidence after the August 2008 war against Russia over South Ossetia, and while a new outbreak of hostilities is highly unlikely, tensions remain high around the country's two separatist republics of Abkhazia and South Ossetia. In recent weeks, Georgia has made some efforts towards a reconciliation with Russia but the process is slow.

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