Russian Companies Ready to Go Public
// The stock market
The market for initial public offerings by Russian issuers, which began to take shape last year, is now experiencing a boom. Dozens of Russian companies are getting ready for IPOs. The overwhelming majority of them are companies in the “new Russian economy” that are placing stock on the open market in order to expand their business. There is reason to think that more and more of them will be placing their stock on the Russian market instead of abroad.
The abbreviation IPO is becoming a commonplace in Russia. Officials of the highest rank use it in their speeches. The term has particular implications in Russia. It signifies the appearance on the market of the stock of companies that have not been traded on a stock market before, or anywhere else. As a rule, they are private companies that have just been transformed in to open joint-stock companies (the Russian abbreviation OAO). In Russia, IPO is used in an even broader context. The first large stock offering by practically any company is called an IPO, such as the stock placement by the Irkut oil refinery, the Kalina concern or NOVATEK, the planned placement by Novolipetsk Steel, or the sale of the state packages in KamAZ and the Far Eastern Marine Steamship Line. That type of stock sale should be renamed. Maybe it could be called PPP (the Russian abbreviation for the translation of “initial public offering”).
The real development of the IPO market in Russia only began last year. IPOs by Russian issuers were extremely rare before then. But last autumn, three companies, the Mechel steel group, Sedmoi Kontinent and Otkrytye Investitsii held IPOs simultaneously. Their experience was valuable. Many Russian companies founded in the post-privatization period perceived the OPI as an effective method of attracting capital for the development of their business. Of course, the volume of IPOs by Russian companies is incomparable with that in New York. In 2004, the total volume of IPOs on the NYSE was $24.4 billion. But the volume of funds attracted by Russian companies is comparable with the volume of placements in London. In the first eight months of this year, 229 IPOs were made for £2.5 billion on the LSE, and almost a third of that was from the AFK Sistema placement.
Now dozens of Russian companies are preparing IPOs. Many are choosing the New York and London stock exchanges for them. “Since 1996, only nine initial public offerings have been made by Russian companies in Russia for a total sum of $650 million, while the total sum of Russian IPOs on foreign markets was $4.6 billion,” noted head of the Federal Financial Markets Service Oleg Vyugin. “Investment bankers who organize IPOs for Russian companies prefer to make them abroad where, they think, the stock can be sold for significantly more because of the large Western investors, who are not active on the Russian market.”
The advantages of making public placements on Western markets seem obvious. There is access to major capital, prestige and the creation of a market for the actual stockholders. The requirements for issuers making placements are higher abroad than in Russia as well. The stereotype of the capital-poor Russian market is beginning to crumble, however. The placement of 10 percent of the stock in MTS on the Russian market has played a major role in this reevaluation. Investors bought that stock within three hours and Deutsche Telecom received $1.5 billion for it. So the advantages of placements in the West are not so obvious after all.
The question of where to conduct an IPO has gone beyond the bounds of investment companies. In September, Vyugin harshly criticized planes by Economics Minister German Gref to sell parts of the state packages in KamAZ, the Far Eastern Marine Steamship Line and Rosneft on Western markets. “That announcement was a signal to Russian businessmen to hold their IPOS in London or New York, but not in Russia,” he said. “Of course, that will negatively influence the development of the national stock market.”
In any case, new Russian companies have realized that the time has come to conduct their business openly and transparently for the investors. Experts at the Moscow International Currency Exchange say that the annual volume of public placements by Russian companies will reach $10 billion by 2010. MICEX general director Valery Petrov said that companies with average capitalization between $100 million and $600 million will be able to make their placements on Russian markets by then. The stock of those companies may become the driving force on the market. Some may consider Gazprom or LUKOIL stock more solid in their portfolios than Compulink, STS Media or Mosmart stock, but analysts say that the stock of Tinkoff, for example, has much greater growth potential than that of Gazprom. And issuers who have only recently sold their stock on the open market will be concerned about it, which is also important.
There is another point of view on the growing Russian IPO market. A number of market players hold that the IPO growth spurt reflects the desire of Russian companies to bring in money before the 2008 residential elections. “Investors think that political risks will increase after 2008. That is influencing the timing of IPO placement,” said Baring Vostok Capital Partners managing partner Elena Ivashchentseva in an interview with Reuters. Roger Manning, head of KPMG in Russia, said that the recent Russian IPOs were most likely made by investors to obtain funds rather then to attract capital. “Those who conduct business in Russia should have money to protect themselves against possible disruptions,” he explained.
Be that as it may, an entire infrastructure has sprung up in response to Russian companies' desire to enter the open market. These range from organizations that take on full responsibility for preparing for a company's IPO to PR agencies that provide informational support. Many Russian companies are not aware of how laborious the process of entering the market is. “It is funny for me to hear the statements by some companies about how they plan to hold an IPO in the next three months, but they have never prepared their accounts under international accounting standards,” said KPMG partner Mikhail Tsarev. “To enter the stock exchange, accounts for at least the last year and a half are needed. It is another matter if a company has already prepared their accounts and been audited under international standards. Then the documentation can be prepared in three or four months.”
Experts estimate that the cost of preparing the accounts of a company with annual proceeds of $100 million is between $100,000 and $300,000, and the cost of preparing the documentation is $50,000 to $80,000. The broad range of pricing is due to differences in the complexity of auditing at different companies. Evgeny Samoilov, general director of Baker Tilley Rusaudit, told Kommersant that “it depends on the company's level and the type of its activity. Even though oil is a high-profit business, it is an easy audit compared to trading. Metals and telecommunications are very complex.”
Nonetheless, the IPO process is unstoppable. “Companies have begun to think about creating and increasing their value. Some enter the capital market, raising their transparency, other look for strategic partners,” Alexander Ikonnikov, partner in Board Solutions, said. “One way or another, people think about how to create real market value out of their assets. That is a major change on the Russian market. It is developing from speculation to investment.”
All IPOs by Russian Companies
| Company |
Stock Market |
Date |
Capitalization at Time of Placement |
Share of Authorized Capital Placed (%) |
Funds Attracted ($ mill.) |
| VimpelCom |
NYSE |
Nov. 1996 |
822 |
13 |
107 |
| Mobile Telesystems |
NYSE |
June 2000 |
2144 |
17 |
364 |
| Wimm-Bill-Dann |
NYSE |
Feb. 2002 |
828 |
24 |
199 |
| RBC Information Systems |
MICEX |
Apr. 2002 |
83 |
16 |
13 |
| Mechel Steel Group |
NYSE |
Oct. 2004 |
2914 |
10 |
291 |
| Sedmoi Kontinent |
RTS |
Nov. 2004 |
620 |
13 |
81 |
| Open Investments |
RTS |
Nov. 2004 |
179 |
38.5 |
69 |
| AFK Sistema |
LSE |
Feb. 2005 |
8181 |
16.5 |
1350 |
| Lebedyansky |
RTS |
March 2005 |
760 |
19.9 |
151 |
| Khleb Altaya |
MICEX |
March 2005 |
78 |
10 |
8 |
| Companies whose stock had been traded in large packages on exchanges or other markets (Irkut oil refinery, Kalina, Severstal-avto, NOVATEK) are not included in the table, nor are foreign companies with Russian assets (Goldstar, Pyaterochka Holding B.V., Evraz Group S.A., Rambler Media, Urals Energy, etc.). |
Sergey Tyagai, Alexey Baibakov, Alexey Lampsi, Olga Kocheva
All the Article in Russian as of Oct. 13, 2005
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