Ben Aris in Berlin -

Ukrainian business is blithely ignoring the tussle for political control of the country between President Viktor Yushchenko and Prime Minister Viktor Yanukovych as the trickle of IPOs is set to turn into a tsumami this year.

Since the Orange Revolution two years ago some 20 small and medium-sized enterprises have sold shares to investors, either as private placements or in formal IPOs. Although figures are sketchy because not all details of the private placements are announced, analysts estimate Ukrainian companies have raised about $675m through stock placements. But that will pale to insignificance if even half the 60 or so companies that have expressed an interest in IPOs over the next two years actually go through with their plans.

The first Ukrainian company to float its shares was predictably enough an oil company. Regal Petroleum raised an estimated $19m on London's Alternative Investment market (AIM) at the end of 2004. Next up was another oil company, Cardinal Resources, which raised $20m by selling 6.6% on the main section of the London Stock Exchange (LSE) in 2005.

A handful of private placements followed, including: fertilizer company DniproAzot, truck-maker KRAZ and Forum Bank. But it was the floatation of real estate company XXI Century the same year that was a watershed, as it gave investors exposure for the first time to the increasingly vibrant consumer spending story. XXI Century raised a whopping $140m by selling 35.7% of its shares on AIM in 2005. Astarta-Kyiv, one of Ukraine's biggest sugar producers, scored another landmark IPO in the last quarter of 2006 year when it raised $30m for a 20% stake on the Warsaw stock market.

Money to expand

Companies are looking to float as they desperately need cash, and they need more cash than the local banks can provide. Ukraine's economy has been on a seesaw thanks to the dramatic politics. GDP growth soared to over 12% in 2004 only to plunge to a little under 3% following the Orange Revolution as businessmen put investment plans on ice. However, last year saw the economy rebound and the economy put in a robust 7% growth, according to preliminary results, while real disposable income was up 16% and retail turnover a massive 25.3% year-on-year in real terms.

"After the Orange Revolution Ukrainian companies started looking west," says Nick Piazza, an analyst with Concorde Capital in Kyiv. "The problem is if a company needs $100m, it can't raise that kind of money on the domestic market so they have to go abroad. And they were pleasantly surprised to find how cheap this money is compared to the cost of capital in Ukraine. It led to some very high valuations. But everyone realised that you have to leave something for the investors as it is easy to get a bad reputation in what is still a small pond."

Still, it is early days for Ukrainian IPOs, which are stymied by the raw state of the domestic capital markets. Analysts say that there is little difference between a private placement and an IPO.

"Private placements with a stock listing do not differ much from IPOs in terms of information disclosure and placement procedures, as they are often marketed to a wide range of institutional and private investors," says Andriy Dmytrenko, chief strategist at Dragon Capital in Kyiv.

Running parallel to companies' desire to tap markets for investment cash, one of the few reforms the beleaguered administration of President Viktor Yushchenko has managed to push through in the last year is to start overhauling the regulations governing the financial markets.

The value of equity was given a fillip by a new investment law introduced by the government in March last year to replace the previous version that has been in place since 1991. The new comprehensive law includes sections on better disclosure, regulates insider issues and introduces procedures for IPOs. The law also introduces more sophisticated financial tools, such as convertible bonds and real estate certificates, and was widely applauded by fund managers and investment bankers.

The valuations of Ukraine's leading PFTS index has more than doubled each year for at least the last three years and seen daily trading volumes jump by more than 300% in the aftermath of the Orange Revolution in 2005 to a total of $700m for the year. The market's index broke record highs nearly every day during the last day of trading in 2006 and has got off to an even stronger start in the first weeks of trading this year too, smashing through the psychologically important 500 mark in the first week of January.

"Owners of most of these companies sold 8-20% stakes, using the proceeds to finance concurrent share capital increases, thus reinvesting the proceeds," says Dragon's Dmytrenko, which was amongst the most active brokerages in 2006, completing 10 IPOs by November worth a total of $344m.

Economic growth drives IPOs

Ukraine's retail sector is hot at the moment. This fast pace of growth is putting huge pressure on companies catering to domestic demand to expand as fast as they can in order to grab as much market share as possible. The trade-off from selling shares cheap now but using the funds to grab more customers is increasingly outweighing the temptation to hang on to shares now and sell them for more later.

LuAZ is the leading Ukrainian automobile producers with $200m in sales in 2005. It sold 8% in January 2006 to raise $26m as part of a larger capital-raising programme to finance a major capacity upgrade in an effort to meet the demand for cars, which soared by a third in 2006.

Velyka Kyshenya, one of Ukraine's largest food retail operators, holds the record for the largest IPO on the domestic market when it raised $27.5m by selling a 10% stake in December 2005, but was more of a private placement than a true IPO, say analysts.

Now the company is considering a placement on the London Stock exchange this year to raise the $50-60m it needs to increase the number of its supermarkets from the current 21 to 100 and so raise its market share from 10.5% in 2006 to reach its goal of 30%. Part of the reason it is looking to London is that $50m is a huge sum for most Ukrainian banks – and would be equally expensive for the borrower.

"Local banks can't cope with a sum of over $100m," says Piazza. "If a company needs to raise this much, then the only place they can find this kind of money is on a foreign stock exchange."

More recently, companies like Myronivsky Khlibproduct, a Ukrainian agriculture and food holding, announced in December it intends to tap international equity markets with an IPO. Yuriy Kosyuk, the chairman, said the company would place around 20% of its shares worth an estimated $150m on the LSE this spring.

The banking sector is another candidate for IPOs this year, although apart from a few private placements, such as Bank Nadra, there have been no formal banking IPOs yet. Like the retail sector, the banking business' growth has been running white hot for more than 18 months and banks are getting increasing desperate for capital. Indeed, the fifth biggest Ukrainian bank Ukrsotsbank had to briefly suspend its lending activity last summer after its capital adequacy ratio fell dangerous low. Almost all the owners of banks have been injecting big dollops of fresh capital to keep up the pace of growth, but this has only bought the banks a year, maybe two, of breathing space; many of the biggest names have already announced IPO plans.

"The IPO route was a natural choice for fast growing local banks like Ukrinbank and Rodovid Bank, who have ambitious management looking to capture a greater share of the fast growing retail lending segment," says Dmytrenko. "Registered in Cyprus, IMB Group opted for a private placement [in 2006] - rather than a London or Frankfurt listing - due to time constraints, as an IPO abroad would have taken much longer and cost the company a great deal more in fees."

But the real excitement over Ukrainian IPOs will come in about 18 months when the leading industrial groups begin to raise billions of dollars on the international markets. Serhiy Taruta, the CEO of leading metallurgical company the Industrial Union of Donbas was the first of the country's oligarchs to announced concrete plans for an IPO last January, when he told journalists the company wants to float on a foreign stock exchange this year.

The IPO plans of Systems Capital Management (SCM), the holding company of Ukraine's richest man Rynat Akhmetov, who is reportedly worth $11.8bn, are now also well advanced. With interests in pretty much everything of note in Ukraine, Akhmetov has been taking the company through a comprehensive restructuring to improve transparency and group like businesses with like in preparation for the flotation.

In late 2005, SCM reorganized all its energy holdings into the Donbass Fuel-Energy Company Association (DFEC), while the metallurgical assets - the source of Akhmetov's wealth - have been grouped under the Metinvest holding, created in June last year. Analysts say SCM has made great strides with improving its transparency and expect SCM to IPO both these holdings separately.

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