Christopher Pala in Almaty -
One byproduct of Kazakhstan's sweeping financial reforms of the 1990s, which created the most sophisticated financial system in the former Soviet Union, has been the ability of its companies over the past 18 months to raise money through IPOs instead of selling stakes to foreign strategic partners.
The series of IPOs began in October 2006. The first to hit the markets was the 10th-largest copper mine in the world, Karaganda-based Kazakhmys, which raised $1.17bn on the London Stock Exchange (LSE) and established itself amongst the top-50 of FTSE 100 companies. Next up was another miner, the smaller Shalkiya Zinc, which raised $101.5m. And a third miner, the KazakhGold Group Ltd, followed that by raising $197m.
Late in 2006, Kazakhstan's banks joined the fray. Kazkommertsbank, the biggest bank in the country, offered investors 45.7m in Global Depository Receipts (GDRs), representing 91.4m local shares, to raise $845m, implying a market capitalization of $5.3bn. It was the first time a bank in the former Soviet Union had made a significant international equity offering.
The bank then broke new ground by following through with a second offering of 103.5m shares on the domestic Kazakhstan Stock Exchange (KASE), bringing the total amount raised to $950m.
oil is fuling Kazakhstan's rapid growth
This string of IPOs marks a watershed for Kazakhstan, but flotations went up a gear when the giant energy company KazMunaiGaz E&P, the wholly owned exploration and production subsidiary of Kazakhstans state energy company, floated in December simultaneously on the London and Kazakhstan stock exchanges.
The two simultaneous offerings raised a total $2.3bn, making KazMunaiGaz the second biggest issuer in Eastern Europe ever, after Russia's flotation of state-owned oil company Rosneft last July (which raised $10.4bn).
Finally, Halyk Savings Bank of Kazakhstan (HSBK), the former Kazakhstan branch of Gosbank (later Sberbank), the national Russian and then Soviet savings bank, raised about $220m in a complex operation at the end of last year.
In the first step, HSBK priced a secondary share issue to imply a value for the whole bank of $748m. The global offering was made by the banks majority shareholder, Holding Group Almex, owned by Timur Kulibayev and his wife Dinara, who is the middle daughter of Kazakh President Nursultan Nazarbayev. Kulibayev, who shaped the countrys oil industry, is considered by many to be the second most influential person in the country.
Almex then sold about 20%, or 46,7m GDRs, of its shares in Halyk on the LSE, including some placed under the option of additional placement, for $748m.
The issue was a huge success and more than 15 times oversubscribed. The GDRs, each representing rights to four common shares of HSBK, were sold at top of the price range at $16 each. Kulibayevs Almex owned 82% of the bank at the start of the process and 63% at the end.
However, that was not the end of the story. After the shares were priced but before they were sold to investors, Halyk launched a rights issue of 55m common shares at the IPO price on the KASE.
Almex used $180m of the money raise in the London issue to subscribe for the new shares on KASE, making use of its shareholder's pre-emptive rights to buy shares during any issue of new shares. When the dust settles, the banks total assets will have been boosted by $220m to $900m.
IPO wave broadens
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More Kazakh companies are set to follow suit this year. Two second-tier banks, ATF and Allianz, respectively the fourth and fifth largest in the country, are expected to conduct IPOs this year, as are the Kazak unit of US utility AES and Eurasian Industrial Association, a producer of aluminium and iron.
Only a few years ago, some bankers were confidently predicting that the countrys thirst for capital made selling out to large European banks inevitable. Now, they are not so sure. "Why sell when you have years of growth ahead of you?" asks Magzhan Auezov, a managing director of Kazkommertsbank, the countrys largest bank.
Kazakhstan enjoys ratings comparable with other Central and Eastern European countries, all of which allowed Western institutions to take over their financial sectors.
But during the 1990s, when Kazakhstan, like the rest of the former Soviet Union, was in a state of economic collapse, foreign banks found the country too remote and its population of only 15m too spread out to buy a controlling share of any bank. By 2005, a half-dozen foreign banks, notably BNP Paribas, Société Générale and Raffeisen, started negotiations with the more attractive local banks. The most prominent, Halyk Bank, was the third largest and has the biggest branch network. Halyk Bank is also the only bank whose CEO, former central bank governor Grigory Marchenko, was openly seeking a strategic partner.
Halyuk CEO Grigory Marchenko
But the banks main shareholder, Kulibayev, declined to agree a deal that would leade to giving up control and he set too high a price for a non-controlling share, causing the talks with BNP Paribas to collapse.
"They decided they didnt need a strategic investor right now," says André Kuusvek, head of the Almaty office of development bank EBRD. "They figured they could make more money waiting and doing an IPO."
Bankers and analysts say the international IPOs, in addition to raising capital, transparency and confidence, also lessen what is politely referred to as financial risk: the possibility that a member of the presidents family might use the coercive powers of the state notably the tax police, the financial police or the KNB, successor to the domestic branch of the Soviet KGB to acquire companies at giveaway prices.
It was just such allegations, made in the parliament in 2001 against Rakhat Aliyev, another presidential son-in-law, that gave birth to the modern opposition, which is focused far more on curbing rampant corruption than on improving an economy that is widely considered to be well managed.
With more capital, Kazakhstan's financial institutions are going to step up their investments outside of the country, predicts KKB's Auezov. "Kazakhstan is going to be producing a lot of capital and investing it in places like Turkey, Russia or even Tajikistan, which has become a very dynamic economy."
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