Russia buys into buybacks

By bne IntelliNews January 23, 2012

Anna Krachenko in Moscow -

Russian companies aren't famous for returning value to shareholders, but in the face of the prolonged crisis in Europe they have been doing just that with a raft of share buybacks. That window of opportunity looks to be closing, though.

Having accumulated large cash piles to battle against today's uncertainties, Russian companies have taken the opportunity of weak stock markets to buy back their shares on the cheap. Russians stocks have always been valued relatively lowly, but with the Micex plunging 17% in 2011 to give a price/earnings ratio of 5.5x, Russian shares have rarely been so inexpensive and eight big name companies approved buyback programmes. "It took a bit more than a month for companies to deal with technical problems - to analyse the situation and to organise the board meetings," says Alemar analyst Sergei Zakharov. "Managers want to prevent a further decreasing of their capitalisation and to show their faith in companies' future."

First off was Russian agricultural holding Rusagro, whose board authorised a $10m buyback of global depositary receipts (GDRs) on August 25. The next day, oil services company Eurasia Drilling announced it would also buy $60m of its own GDRs over the period of a 180-day programme. Then in September mining giant Norilsk Nickel and Russian meat producer Cherkizovo also approved buyback programmes to repurchase 7.7% and 2.0% of their shares respectively. In October, the boards of industrial conglomerate Sistema, internet company Group, telecommunications holding Rostelecom and fertilizer produced Uralkali also initiated buybacks. The last two companies to join the club were coal miner Raspadskaya and estate developer Elaton Group.

Buyback battles

The first to complete a programme successfully was Norilsk Nickel, but thanks to Russian legislation it came with a twist. As a buyback allows shareholders to increase their stakes in a company, the repurchasing of $4.5bn worth of the company's shares became a weapon in the long-running war between the company's major shareholders, Interros and Rusal, which put the whole programme in danger of being cancelled.

On September 28, the day when the buyback was announced, Norilsk Nickel's stock price reached RUB7048 per share and a 40% premium was on offer from the deal. Shareholders rushed to the company's registrar to tender their stock before the deadline. But the company's stock price started to fall over the subsequent trading sessions when it became clear that many private investors wouldn't be able to submit their offers in time. On November 3, Norilsk Nickel claimed the buyback successful: $120m worth of shares were tendered for $306 per share with a pro-rata coefficient of 10.95%.

The buyback of AFK Sistema shares went more smoothly. Between October 3 and November 4, the company spent $72m from a budgeted $100m to acquire Sistema and shares of its mobile phone subsidiary MTS. The company purchased 375,972 shares (at an average price of $16.61) and 8.745m (at an average price of RUB20.97) shares from markets in London and Moscow respectively.

The total value of the MTS buyback was $60m, or 4.311m ADRs at $13.92. Sistema managed to buy the first batch of shares at a low price, but the market soon stabilised and the price started to rise again. Zakharov says the company wasn't quick enough and as the cost of the buyback started to increase, the process was halted.

Uralkali's one-year buyback programme started on October 7 with plans to spend up to $2.5bn on buying its own shares and GDRs. Uralkali had lost nearly a third of its value in the summer's sell-off from its peak and the board claimed the company was undervalued. According to market speculation, part of the motivation for the buyback was an effort to raise the company's share price, as the owners were under pressure from margin calls (demands for cash from creditors when shares used to collateralise a loan fall below an agreed level), but actually had no intention of buying any shares back at all. However, Aton Capital analyst Mikhail Pak argues the programme was driven by business reasons. "I don't think they would announce a buyback just to support major shareholders, the company went along with market trends."

The day Uralkali announced its buyback programme the company's stock price jumped by 11%, but no purchases were made until November 28, when the company bought 7,46m shares at an average price of $7.38 and 1.25m GDRs at an average price of $37.32, spending a total of $102m, or 4% of the total buyback programme.

Buying back stock when it's cheap is a classic defence in falling markets. But with the Russian stock market rallying from the end of December into January, the window for cheap buybacks appears to have closed.

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