Andriy Dmytrenko -
The budding IPO market in Ukraine promises to benefit companies and investors alike enormously.
The IPO market in Ukraine sprang into life in late 2005 with the London placement of real estate development company XXI Century and has picked up steam this year.
In Ukraine, institutional investors both foreign and domestic play the major role in the IPO market, as retail investors still account for only a very small share (10-15%) of total stock trading volume. Moreover, 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.
For Ukrainian companies, an IPO offers the following benefits:
1. A higher valuation than a strategic sale or private placement (as it incurs a premium for transparency), especially for fast growing companies and sectors (growth premium);
2. A third-party validation of the business' valuation;
3. Maximizes the exit value through a stage-by-stage sale, when owners sell part of the company, capitalize it to stimulate further growth and then sell the remaining stakes (in one more or several stages);
4. Provides owners with equity that they can use to retain top management (via stock options) or in M&A deals (via stock swaps);
5. Represents the cheapest source of long-term financing, which also helps to reduce debt financing costs (as public companies can borrow cheaper than private ones due to increased transparency);
6. Allows owners to retain operational control of the business (as opposed to a strategic sale);
7. May provide broader access to, and leverage over, investors thanks to wider recognition in the marketplace and better transparency.
After XXI century broke the ice, IPO activity has picked up notably this year. Dragon Capital, the most active player on the market, has completed 10 placements so far, raising $344m in equity for Ukrainian companies. Of those, placements, five were companies from the retail, automotive, banking and media sectors.
Owners of most of these companies sold 8-20% stakes, using the proceeds to finance concurrent share capital increases, thus reinvesting the proceeds. The following table highlights the 10 placements organized by Dragon Capital over the past 12 months:
Ukraines banking sector has been growing at an average of almost 50% a year over the past five years and local banks continually require new capital to cope with the rapidly growing demand for retail and corporate lending. Thus, 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.
Registered in Cyprus, IMB Group opted for a private placement 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. Higher current and potential future growth allowed local banks to be valued at higher multiples.
Likewise, the retail sector (supermarket chains) benefits from robust (more than 30% a year) growth in nominal disposable income in Ukraine and requires additional financing to expand into regions where the penetration of organized retail trade is smaller and growth potential is higher due to less competition. Thus, companies in this sector require long-term equity financing with a combination of debt financing. Some retail chains have attracted comparable debt financing on attractive terms after going public.
LuAZ, one of the leading Ukrainian automobile producers, sold stock in an IPO as part of a large-scale capital raising programme aimed at financing a major capacity upgrade, which was prompted by robust demand for new cars in Ukraine.
For investors, IPOs of Ukrainian companies offer attractive investment opportunities as they fit into the definition of a successful IPO by meeting most of the following requirements:
- Operate in a fast growing market often with low penetration, implying strong future growth;
- Offer attractive product mix and can be among market leaders in their segments;
- Boast experienced and credible management;
- Have transparent corporate and shareholder structure;
- Have a clear vision of how to use the IPO proceeds (with funds often fully reinvested).
We expect the robust growth in domestically oriented consumer sectors (driven by strong economic growth and helped by political stabilization) to continue, which will stimulate IPOs in the financial services (banking, insurance), retail (food, non-food), real estate, and food & beverages (alcohol, dairy, confectionery, poultry) sectors. Demand for IPOs will be boosted further by the development of private pension funds, which will in turn create a base of domestic retail investors similar to that seen in neighbouring Poland.
We believe Ukrainian companies will continue to give preference to domestic IPOs over foreign listings due to:
- Less strict information disclosure and financial audit requirements;
- Lower placement costs (lead manager fees);
- Better coverage by more knowledgeable local brokers.
Yet domestic IPOs will be accompanied by the issuance of depository receipts or warrants abroad. Foreign listings will also grow as many local companies that went public domestically have included a London listing in their mid-term plans.
Andriy Dmytrenko is the Chief Strategist at Dragon Capital in Kyiv
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