Russia’s stock market is hot. Powered by soaring oil prices, the benchmark Russian Trading System index rose 11 percent in the first two months of the year while most other emerging markets slumped. So why were three initial public offerings of Russian companies pulled from the London Stock Exchange in rapid succession last February? Investors say the answer is their oligarch owners’ unreasonable price expectations, enabled by too many investment banks chasing too little business through their Moscow offices. “The pricing process is not very well grounded on planet earth,” says Bernard Sucher, a board member at Aton Investment Group, a brokerage firm based in the Russian capital.
The three cancellations – from coal miner Koks, oil and gas pipe builder Chelpipe, and precious metals digger Nord Gold – made a disappointing start to a year that was supposed to bring Russia back to the IPO main stage, according to those same investment banks out scrapping for the mandates. Moscow-based Renaissance Capital predicted Russian private companies would raise $20 billion in equity market debuts during 2011, and sell-offs from state companies would add another $10 billion. That total would approach the country’s record $36 billion in issuance during the glory year of 2007.
Unfortunately the 2007 sales proved less than glorious for investors. Shares in state oil company Rosneft trade barely above their Sept. 2007 starting level, despite the renewed boom in world crude prices. State bank VTB has lost 40 percent since the day it went public.
The tight-knit group of fund managers who follow Russia closely had hoped the IPO class of 2011 would learn history’s lesson and price their issues with more upside for the buyer. That has not been the case so far. Nord Gold, for instance (advised by Morgan Stanley and Credit Suisse), sought to value itself at a 10 percent discount to global peers like Barrick Gold, one investor says. The market would demand at least a 25 percent mark down to offset Russian political and operational risk, so the deal was scratched.
One ingredient in this losing formula is the typical Russian oligarch who owns the asset. (Nord Gold is a subsidiary of steelmaker Severstal, controlled by billionaire Alexei Mordashov.) These men made their fortunes through the brutal process of 1990s privatization, where winners did indeed take all and any sign of weakness could be literally fatal. Leaving something on the table is not particularly in their DNA. The Kremlin also rushed to prop up any productive industry during the crisis of 2008-09 with liberal credit from VTB and other state banks. That leaves the oligarchs less pressed by their large debts than they would be otherwise, and less desperate for cash from the market, particularly now that business has rebounded.
The other element, investors say, is investment banks that have thrown off their traditional role as underwriters who actually buy a chunk of the stock they are issuing themselves. The banks’ Russian offices, at least, act only as advisors to their IPO clients for a diminished commission of around 1.5 percent. That creates an incentive to name almost any price in order to please the seller and win the mandate.
Some investors still hope the market can find reasonable price levels. Russian companies raised about $4 billion in IPOs last autumn, and buyers have turned a comfortable profit on most of them, points out Liam Halligan, chief economist at Prosperity Capital Management, which owns some $5 billion in Russian equities. The issues in the black are an encouragingly varied lot, too, including social network provider Mail.ru, bridge and road builder Mostotrest, retail chain O’Key, and Transcontainer, a freight unit spun off from state-owned Russian Railways.
Halligan is looking forward to a new smorgasbord of share offerings later this year from leading iron ore producer Metalloinvest, cell phone realtor Evroset, and perhaps a few of the utilities spun off a few years ago from former state monopoly UES. Whether he will like the price is another matter.
