Guy Norton in Moscow -
Positive numbers on both the economic and portfolio investment fronts for Russia should help ease wannabe equity issuers' path to market in the coming weeks, with over $1.5bn worth of stock due to be sold in the next couple of months.
After Russia last year suffered its severest recession since the collapse of the Soviet Union in 1991 as its GDP fell by 7.9%, growth forecasts for 2010 are being constantly upgraded, with the latest investment bank predictions running as high as 7% - twice the levels posited at the start of the year. Meanwhile, Russia is very much the market of choice among equity investors, with Russia-dedicated funds attracting more than $1.5bn of new investment in the first three months of the year.
Both sets of data are good news for those Russian companies looking to raise equity capital at home, with the first wave of would-be issuers hitting the marketing trail in Moscow in April. Among those looking to sell stock on the Russian Micex and RTS bourses are seafood company Russian Sea, drug retailer Protek, farming group RusAgro and coalminer Kuzbass Fuel, which between them could raise as much as $950m. Meanwhile, fertilizer company UralChem is looking to list in London with an IPO that could raise as much as $600m.
Should the initial crop of planned issues come to fruition, bringing to an end what has effectively been a three-year IPO drought in Russia, it will help give added zest to this year's positive tone in the Russian equity markets, where the main indices are showing a 10% gain this year, taking Russian stocks to their highest levels since July 2009 and outperforming the other Bric markets of Brazil, India and China.
Give an inch, don't take a mile
While investors welcome that many of the companies looking to list are raising expansion capital to grow already successful businesses, they also caution lead managers not to try and bring companies to market at unrealistically high valuations. "Investment bankers need to wake up and smell the coffee," says Florian Fenner, managing partner at Deutsche UFG Asset Management. "This is still very much a buyer's, not a seller's, market."
Kevin Dougherty, portfolio manager at Pharos Financial Group, is also wary of the potential investment environment for both Russia and the rest of the world in 2010, cautioning that despite recent encouraging economic data, nobody should write off the possibility of a double-dip global recession quite yet.
With those comments in mind, lead managers will need to be sensitive in matching owners' high pricing expectations with the much lower valuations that investors are prepared to pay if the infant revival in IPO issuance is not to be stillborn. The only major IPO from Russia this year, the $2.2bn listing in Hong Kong by Russian aluminium titan Rusal, proved that Russian companies, especially highly indebted ones like Rusal, are still a tough sell internationally. At one point, Rusal's shares had dropped in value by a third since listing, but had clawed back some of that ground by mid-April to be just 10% lower than the offering price of HK$10.80.
Despite widespread predictions of a potential $30bn-plus of equity issuance from Russia this year, Steve Meehan, head of Russia/CIS at UBS, says: "It's always dangerous to prognosticate actual volumes, as the deal season hasn't really begun. But we have a strong pipeline of deals that will happen and be successful." He concedes, however, that post-crisis investors are more price-sensitive about valuations of Russian companies. "Buyers are smarter and more cautious about Russia - they know the markets can go two ways - both down as well as up."
Positioning a company from an unusual sector such as seafood concern Russian Sea, which will likely be first to market, could prove a challenge. Bookrunners Renaissance Capital and VTB Capital are marketing the firm at $6-8 per share with a view to raising as much as $173m at the top end of the range through the sale of a 27.3% stake. Russian Sea, founded by brothers Maxim and Andrei Vorobyov in 1997, initially imported fish from Norway. The group has since expanded into fish farming and processing, including factory in the Moscow region that produces over 60 types of seafood. In 2009, turnover was RUB17.3bn ($590m), giving it a 12% share of the Russian fish and seafood market. It will use the IPO proceeds to pay down debt and for investments and working capital purposes.
Meanwhile, in the latest sign of the development of the local fixed-income market in Russia, gas giant Gazprom has mandated Gazprombank and Renaissance Capital to arrange RUB300bn ($10.24bn) of bond issuance over the next five years to fund new exploration and new pipelines.
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