Investors choke on first bite at Russian IPO apple

By bne IntelliNews February 8, 2011

Tim Gosling in Moscow -

A vital week for Russian IPOs got off to a terrible start on February 7. After a mostly barren year for Russian IPOs in 2010, coking coal and pig-iron producer Koks was intending to continue recent attempts to satisfy pent-up demand for Russia stocks with a listing in Moscow and London, but pulled the deal at the last moment, citing "poor market conditions."

In Russia, that translates as investors baulking at the price of the offer - something that's becoming especially common for commodity stocks. As such, the news will have three other companies set to float this week on tenterhooks.

Koks has no great need for cash; the proceeds of the listing were set to go to the owner personally, but other companies that have announced plans to list in the first half of this year - HMS Hydraulic, ChelPipe and Nord Gold - will now be extremely nervous. According to Reuters, the books on HMS Hydraulic's $652m offer were no more than 75% covered.

Some $4bn worth of new shares were floated last year, the bulk of it in the final quarter as liquidity and risk appetite rose, and a stream of announcements followed on its heels. Analysts suggest there will be around $8bn worth of stock made available via IPOs in 2011 ($10bn including secondary share offerings), although that's still far off the peak of $36bn issued in 2007 when oil prices averaged $72.32, according to Morgan Stanley.

Renaissance Capital's head of equity capital markets for Russia, Arie Kravtchin, says that if all the plans to list mentioned by Russia's hydropower producers, gold miners, pipe makers and state-run banks come to fruition, they could raise as much as $30bn - although that includes $20bn via the government's huge privatisation programme. "There is plenty of liquidity on the market to meet this large pipeline," Kravtchin says. "Investors will find the cash if it's an interesting deal at the right price."

Optimism on the outlook for IPOs this year has been rising since the Russia stock market began to rally at the end of last year. While global emerging markets (GEMs) were the hot item for portfolio investors in 2010, Russia got largely passed over. By the start of this year, commentators were saying GEMs were over priced and predicted a correction, but Russia's shares have soared, as it remains the last big GEM with significant upside to its valuations.

In addition, a combination of strong economic growth in India and China, plus the tsunami of cash unleashed by the US Federal Reserve in another round of quantitative easing in November to the tune of $600m, are expected to combine to keep commodity prices high; oil prices have already broken the $100-per-barrel mark in January and will almost certainly come in above the average of $75 the Kremlin's budget forecasts. Kravtchin says as long as oil and metal prices remain high, investor sentiment will be boosted and equity sales could return to their pre-crisis peak.

Mixed bag in 2010

However, sentiment was hit from the off with Koks, first out of the gate, falling at the first fence.

Right now, it looks like an action replay of last year. The few floats that did get away in 2010 were a mixed bag. Through the first nine months of the year, many were pulled as investors demanded higher discounts than owners were ready to offer. Most that did go through proved the market right, with the likes of Rusal, Russian Sea and Protek tanking immediately on the secondary market.

However, many of those stocks recovered to trade above their issue prices late last year as risk appetite rose alongside liquidity. At the same time, the IPO pipeline cranked back open, and the roaring success of internet group's float - and to a lesser extent retailer O'key - in November persuaded many others that the time was right to jump aboard the bandwagon.

Those results illustrated that whilst investors are very enthusiastic to invest in domestic themes, they're far more wary when it comes to the more traditional resources and commodity sectors. For instance, metals company IRC was forced to slash its offer by 50% in October as it went through at the very bottom of its initial price range.

The similarity with the opening salvo in 2011 is eerie, as Siberia-based Koks announced on February 4 that it was putting its $500m float on the backburner. Analysts told Reuters that the offer was overvalued, and expect Nord Gold's forthcoming float to be forced lower than the announced price, if it is to go ahead at all.

It's an old story, that sees investors twice shy, despite the pent-up demand for Russian stocks, of a track record that goes back well beyond last year of high-priced IPOs performing poorly after listing.

A source close to the Koks flotation told the newswire that while tensions in Egypt had hit investor appetite during the book-building process, the firm had received enough orders for all the shares on offer, excluding the over-allotment option. Concern over how the issue would trade in the after-market, however, and the fact the firm did not need to raise money - most of the proceeds were due to go to tycoon Boris Zubityskiy and his two sons - resulted in it being pulled. Koks was not willing to cut the price, the source said, and was worried that reducing the size of the float would hit liquidity.

That's a luxury others may not have, however. HMS Hydraulic appears willing to accept that investors will buy - but only with a significant discount - and reportedly is likely to price its offer at the lower end of its $9.25 to $12 range. Management have also decided to forego a $15m bonus it was originally set to collect on completion, as the idea wouldn't wash with investors.

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