Tim Gosling in Moscow -

Russian equity offerings finally found a little much-needed love on Valentine's Day. Following a depressing week that saw several IPOs crash and burn, VTB Group announced on February 14 that its share issue of a 10% stake was over-subscribed, whilst another small issue on the Deutsche Boerse proved that pizza is worth more than gold.

Coming into 2011, life looked rosy for Russian companies hoping to raise equity funding. The economy was recovering steadily from the global recession, oil prices were nudging $100, and after a shutdown through most of the year, the last quarter of 2010 had seen a handful of IPOs attract strong interest. All this prompted some analysts to forecast as much as $30bn worth of Russian stock would make its way onto the markets this year.

Those hopes were dashed in the second week of February, however, as issuers ploughed into a $2.5bn multi-IPO pile-up in the City of London. Pig iron and coke producer Koks was the first to crash, pulling its offer on February 4. Within a week, Chelpipe and Nord Gold had hit the same pothole, whilst HMS Hydraulic Machines & Systems Group was sent spinning. Saddled with debt, the oil and gas service provider was forced to slash its price below the bottom of its guidance range.

The companies all pinned the blame on the road - "market conditions" - rather than their vehicles, the inference being that the listings were unwitting victims of the sharp pullback in funds going toward emerging markets. Across the fortnight to February 9, the fund information provider EPFR reported that $10bn fled emerging market funds. However, in the midst of its flight from destinations such as Shanghai, some of that cash took a detour to Moscow. Russia, having missed the emerging market rally of 2010, is alone in seeing inflows this year, and took in $463m over the same two weeks.

In other words, there was no lack of demand; rather the real driver behind the failed floats is the old Russian story: the offers were simply priced too high for relatively small and little-known companies, as many analysts had been suggesting ahead of the crash. Even high-profile parent Severstal couldn't push investor offers on Nord Gold into a guidance range above the historical peak of its off-market trading. Dmitry Smolin of investment bank Uralsib called the target of ₤3.00-3.90 "very expensive," adding that the bank would not recommend participating in the IPO at such a price. "We would buy Nord Gold only below ₤2.20 per share," he said.

Meanwhile, the top of Chelpipe's range asked investors to pay a premium over peer TMK, which is more than twice its size and far more transparent.

According to Reuters, sources close to the deals complained that the firms were stubborn over valuations and reluctant to listen to feedback from investors. "Russian issuers are always greedy and most IPOs underperform in the aftermarket," a source close to Chelpipe's aborted attempt suggested to John Helmer at Dances With Bears.

A 3% or so decline in HMS Hydraulic's shares the day they launched on the London Stock Exchange only helped cement investors' wariness.

Banking on some success

Amidst the carnage, VTB's $3.3bn secondary share offering was one exception that proved the rule: that big names, willing to be more flexible on price, will attract investors, even if the interest is no more than lukewarm.

Poor management did much to dent enthusiasm, which came after a private sale of the stake to US private equity firm TGP broke down. The offer went through just below the market price, which itself was only just starting to recover from a 13% tumble provoked by (quickly refuted) suggestions that a second stake might be put on the table before the end of the year.

However, as the opening salvo in the Russian state's $60bn privatisation programme this year, VTB's deal was never going to be pulled. The government managed to boost the final price by $0.25 above its original target of $6.00 on the back of a twice-oversubscribed book, although rumours persist that some oligarchs may have been called in to help support the sale, just as they were for the bank's 2007 IPO, which went through at $10.56.

The success of the VTB deal, with help from another at the other end of the size spectrum, reinforced another key trend amongst Russian share offerings: that it's the Russian consumer, rather than the global commodities customer, at the forefront of investors' minds.

On the same day that Nord Gold ploughed into the back of the Koks and Chelpipe wrecks, a small pizza company was cruising into Frankfurt to raise €16m.

On the one hand, the small size of the offer from St Petersburg's Papa John's helped push it through, whilst CEO Darrin Stock also waxes lyrical about the advantages of Frankfurt - which features a Russian fast-track service offering a pool of investors dedicated to the country - over London. That the company is a subsidiary of a large US-based parent (Papa John's International - the world's third-largest pizza restaurant company) was also seen as a significant advantage.

However, the base case is that investors are increasingly diversifying their pricing on Russian stocks according to sector, with consumer-facing names highly favoured. It was the success of the November float by internet group Mail.ru - in the midst of difficulties for another bevy of commodities-facing offers - that did much to encourage the optimism at the start of the year.

With the shares of the country's major grocery retailers already very expensive, and largely facing the lower-income sections of the population, the hunt for alternative routes to tap into Russian retail is keen. Investors see segments such as the internet and restaurants offering exposure to the disposable income of the growing middle class, and at good prices.

The next company to test this appetite could be shoe retailer Tsentrobuv, which announced on February 11 that it will launch a London IPO this year. That could see it come up against the next large privatisation, the giant Sberbank having confirmed that it will put a 7.6% stake - a placement that would be around twice the size of the VTB offer - on the table at some point in 2011.