Russian firms scramble while IPO window open

February 1, 2011



Russian companies could have mere weeks to seize a short window to launch IPOs as investor confidence remains fragile and the state mulls a privatisation plan that could swamp capital markets.

Four Russian firms are set to announce prices for IPOs in London in coming days, seeking to raise around $3.3 billion – more than half the $5.5 billion total raised last year.

Further pent-up demand from private issuers could swell the total to more than $30 billion this year, in line with the boom year of 2007, but they will have to make the most of limited opportunities to catch investors confident enough to pay top dollar.

“The window of opportunity opens only sporadically, and with the volatility in the developed world you can be sure it will slam shut again,” said Roland Nash, senior partner at Moscow fund manager Verno Capital.

“It is the gap between when people feel confident enough in their own economies to invest in Russia, and when something happens to crush risk appetite,” he added.

Russia’s turn-of-the-year share price rally has helped open the window, making company valuations more favorable to tycoon owners and pushing other emerging markets into the shade.

The dollar-traded RTS exchange has risen nearly 18 percent since the beginning of December, compared with a fall of 1.6 percent on Brazil’s Bovespa .BVSP and a 7 percent fall on India’s Bombay Stock Exchange .BSESN.

The gain – supported by oil prices near $100 a barrel and expected to continue to possible record highs through 2011 – has been maintained even as violent protests in Egypt triggered corrections on many other equities markets including the United States.

“Some investors may even use Russia as a hedge against (Egypt) as turmoil in that region might push up oil prices, which is obviously good for Russia,” said Yaroslav Lissovolik, chief strategist for Deutsche Bank in Russia.

Mikhail Gibault, deputy head of investment banking at Troika Dialog, said overseas investors are showing enthusiasm for Russian resource offerings in the current climate, while the companies themselves are desperate for cash to fund expansion.

KOKS, the world’s biggest producer of pig iron, is a current IPO candidate, as are oil & gas industry suppliers ChelPipe and pump manufacturer HMS Hydraulic.

“A number of Russian companies coming to the market are direct or indirect plays on commodities. There is investor demand to play the commodities upside – especially via new stories,” Gibault said.

“Equally we see more and more Russian companies willing to expand, organically or via acquisitions. This trend is accelerating.

“Seizing the right three- or four-week market window when valuations and investor sentiment are supportive is critical for the success of the deal,” he added.

Looming Barriers

Risks that could derail the IPO movement include a flaring up of the eurozone sovereign debt crisis – the Greek panic forced a number of Russian IPO hopefuls to abandon plans last spring – or inflationary worries at home.

“China and Russia do not want to see massive inflation moving prices as they face political tests in 2012,” said one investment banker involved in the KOKS offering.

“In developed markets I’d say the inflation story is delicately balanced. You could see the ECB or Bank of England hiking rates by 50 basis points at some point. That is a good reason to get on with the IPO business now,” he added.

Another looming barrier to IPO ambitions is Russia’s 1 trillion rouble ($33.68 billion) privatisation plan, which will see the government sell stakes in scores of state assets in a bid to plug the budget deficit.

Several prized assets in Russia’s oil and gas sector are to be the main course, with the two top banks, VTB (VTBR.MM) and Sberbank (SBER03.MM), as the hors d’oeuvre.

Sberbank, the larger of the two, is almost certain to be sold via a secondary share placement abroad to give foreign investors easier access to an investment widely viewed seen as a proxy for Russian growth.

Sales like Sberbank’s, worth $5.6 billion at current prices, are likely to drain investor appetite for Russian stock.

“You don’t want to end up competing for capital with state-owned companies … If you raise money now, you can be one of the few companies able to go out and invest,” said Nash.

($1=29.69 Rouble)