Russian IPO rush means investors can be choosy
Russian initial public offerings are set for a comeback. Some $20 billion of Russian share sales are forecast this year, including dozens of IPOs. With plenty of options, investors should be able to drive a hard bargain.
Following a two-year lull in activity, bankers are excited at the prospect of a return to the heady days of 2006 and 2007, when Russian companies raised some $37 billion in 42 international share issues. Media group Profmedia plans to raise $500 million in April with a London listing, while iron ore miner Metalloinvest and coal miner SUEK are mulling billion-dollar IPOs in 2010.
Russian new issues have been understandably popular with investors in the past. They tend to be sizeable and offer exposure to high-growth sectors. The Russian stock market also appears less expensive than other emerging markets on some measures.
But issuing companies’ bosses often have inflated estimates of what they are worth. Around two thirds of all Russian IPOs have underperformed the local stock market since issue date, in some cases losing 80 percent of their value, according to data compiled by Renaissance Capital.
That suggests the prices of previous Russian IPOs were too high. This time, it should be different. Aside from the sheer number of possible candidates, many Russian companies are under pressure to raise money quickly. They borrowed heavily before the crisis and need cash fast.
Uralsib Capital estimates that Russian companies will issue $55.5 billion of equity in 2010 and 2011, of which $17.5 billion is required to repair balance sheets. The Profmedia IPO, for instance, would help repay some of parent company Interros’s $2 billion of debt. With local finance still scarce and expensive, smaller and less indebted Russian companies also need to raise equity to kick-start stalled expansion plans.
Investors during the last wave of Russian IPOs were too willing to stump up cash. This time, it should be more of a buyer’s market.