Global Investing

Russian equity sales: disappointing

December 28, 2012

Investment banks have been dismayed this year by the slump in first-time share listings across emerging markets, the area they had hoped would yield the most growth (and fees). But as we pointed out in this story, emerging IPO volumes fell 40 percent this year. And equity bankers have seen lucrative IPO fees dry up – they almost halved this year from 2011  and are a third of 2007 levels.

One market that has possibly disappointed investors most is Russia.  Its plan a few years ago to privatise large swathes of state-run companies via share sales had bankers salivating — estimates for the proceeds ranged from $30-$50 billion. The pipeline is still alluring, with all manner of companies up for privatisation, including shipping company Sovcomflot and the Russian Railways monopoly.  The Kremlin did raise $5 billion this year by selling a 7.6 percent stake in Sberbank, the banking giant, but not much else has come to pass.  In fact, 2012 saw the state tighten its grip on the energy sector, as government-controlled Rosneft bought oil producer TNK off BP, forking out $12.3 billion and some equity.

Sberbank analyst Chris Weafer estimates Russian companies raised $2.5 billion this year via IPOs, including a $1.8 billion offering from mobile operator Megafon- that’s almost half last year’s levels. Actually, the picture is not that dismal. Weafer points out that total equity issuance to the market, including strategic stake sales by shareholders, came to  $12.8 billion (the total was bumped up by the $5 billion Sberbank deal) and that is up from last year’s total of $9.9 billion.

Clearly, the opportunity to issue new equity depends on prevailing market conditions and the level of investor optimism. It also depends on the willingness of existing controlling shareholders to sell equity at a valuation that is attractive to investors.

The Megafon deal for instance priced at the lower end of estimates. For 2013, Weafer predicts some $15 billion in Russian equity issuance.

But some banks  are getting frustated. Any available equity business is increasingly being scooped up by Russia’s state-controlled banks VTB and Sberbank, which have aggressively built up investment banking teams. Foreign banks, on the other hand, are facing pressure to retrench. Barclays and HSBC have shut retail operations in Russia but the most high profile investment banking exit came earlier this month, when Credit Suisse, a Russia veteran that had stuck it out through the 1998 crash, moved its Moscow investment banking advisory to London. Insiders blamed the dearth of deals.

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