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Analysis & Opinion
05.10.10 Public Offering
By Tai Adelaja

Up to 113 companies from Russia, Ukraine, Kazakhstan and other CIS countries have announced plans for an IPO since January, according to the IPO-tracker report published by The PBN Company on Monday. It seems Russian firms still harbor plans to flood the domestic and international markets with bonds and share placements after a cash drought during the country's first recession in a decade.

Analysts say Russian IPOs could exceed $20 billion this year alone, as cash-starved Russian companies have forayed into stock markets in places like London, Hong Kong and Paris. RusAl, the world's biggest aluminum producer, raised $2.2 billion in a January Hong Kong listing, followed by $400 million by drugs distributor Protek and $90 million by seafood firm Russian Sea. However, traditional extractive industries have continued to dominate Russia’s prospective IPO landscape, despite government efforts to diversify the economy.

Russia's largest steelmaker Severstal said Monday that it will push ahead with an Initial Public Offering of its gold division in London this year, in a deal expected to value the business at about $4 billion. Analysts have valued Severstal, majority owned by Alexei Mordashov, at $3.6 billion, but one of the bankers taking part in the deal said the price could rise to four to five billion dollars. The company's gold division consolidates several mines in Russia and Kazakhstan as well as faraway places like Burkina Faso and Guinea. The miner plans to raise its annual gold output to one million ounces by 2013, and produce about 640,000 to 670,000 ounces in 2010.

Another market leader, Petropavlovsk, formerly known as Peter Hambro Mining, said last month that it will proceed with a Hong Kong listing of its non-precious metals division in October, in another sign that domestic market conditions in the extractive industry are improving. The miner planned to raise about $500 million to $600 million in the IPO, according to two sources close to the deal cited by Reuters. The miner’s iron ore assets were originally demerged from the company as London listed Aricom in 2003, with Jay Hambro as CEO. However, the implosion in financial markets after the credit crisis caused the shares to crash and the company was taken back into Petropavlovsk last year. Analysts said that the iron ore unit, under new subsidiary IRC, will list in Hong Kong during October 2010, in a move expected to bring the division, which includes Petropavlovsk's iron ore operations, closer to its booming Asian client base. But some Russian firms are finding their issuance plans marred by global market volatility, which has rocked the market since 2008. Of the 113 reports of potential IPOs listed by PBN, 102 IPOs are still pending and only eight have been completed. Three IPOs have so far been cancelled, including those planned by UralChem and Rusagro. Agricultural group Rusagro announced the decision to postpone its $300 million public share offering in May, as global market jitters cast further doubts over Russian firms' plans to raise billions of dollars via IPOs this year. This followed a similar step by fertilizer maker UralChem to delay its $642 million IPO. Rusagro, controlled by lawmaker Vadim Moshkovich, had plans to raise about $300 million through the listing, with around half the proceeds to go to the owner and another half to be reinvested in the firm. Rusagro accounted for 18 percent of Russian sugar production last year, according to the company. It has seven plants that can process either 30,000 metric tons of raw sugar beet or 5,350 tons of raw sugar cane a day. Coking coal and steel producer Mechel raised only $229 million in Hong Kong in May in a delayed share placement, less than half as much as hoped. At the initial size and price guidance, Mechel's placement had been expected to raise $524 million to $689 million for the Justice family shareholders.

In its quarterly research issued in July, The PBN Company said only seven out of the 79 CIS companies that have declared plans to issue IPOs during the first six months of 2010 actually completed listings. “There’s a whole lot of smoke but very little fire when it comes to IPOs from this part of the world,” PBN CEO Peter Necarsulmer said. The number of companies planning IPOs continues to grow, while actual flotations remain few and far between.

Necarsulmer said that despite difficult market conditions and only a handful of flotations so far, there is no shortage of listing announcements, rumors and speculation. In the past three months, 62 companies have added their names to the list of Russian, Ukrainian, Kazakhstani and CIS companies planning to go public. At the beginning of 2010, only 17 companies had indicated they were planning IPOs. It is unclear, however, how many are real IPO candidates, Necarsulmer said, adding: “Only a small percentage will actually go forward with their plans. Unfortunately, some companies may be using IPO rumors only to raise their profile and gain name recognition rather than having genuine intentions to go to market.”Such whiffs of pessimism notwithstanding, some Russian banks, including VTB Capital and Renaissance Capital, have positioned themselves to reap a likely windfall from a surge in IPO debuts. VTB Capital CEO Yury Solovyev announced plans in early June to triple its Asian presence in three years by setting up operations in Hong Kong and venturing into new business areas such as equity capital raisings, trading and mergers and acquisitions. VTB Capital might also move trading desks to Asia to help provide liquidity for equity and debt issues sold by the Russian bank to Asian investors, Solovyev told Reuters in an interview. He added that several Russian firms were keen to list shares in Asia, and VTB Capital was working on two offerings in Hong Kong that it hopes to launch this year. VTB Capital was a bookrunner for aluminum producer RusAl's initial public offering in Hong Kong earlier this year, the first such offering made by a Russian company in Asia.

In late June, Renaissance Capital announced the opening of a new Hong Kong branch, where it aims to build a base for Russian and CIS countries attempting to raise capital in Asia. The office will employ securities traders and specialists in the metals sector and will give Asian institutional investors access to Russian stocks and consulting expertise, the company said. "We are seeing a rapid growth of the number of merger and acquisition deals between Asia and other developing markets, so we are expanding our presence in Asia," said RenCap CEO Stephen Jennings, The Moscow Times reported. "Hong Kong will become the global hub for resource and energy" in the near future, and access to Chinese capital was the chief reason for choosing Hong Kong over Singapore, another location considered for the Asian office, said Jeremy Sparrow, who will head the new office. "[There are] a number of deals in the pipeline of companies from Russia, the CIS and Africa to begin trading in Hong Kong. For such companies, it would be easier to deal with an agent at a local office rather than 'parachuting into Asia’," he said.
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