All Is Quiet on the IPO Front — For Now

UralkaliUralkali workers on the job. The fertilizer producer raised eyebrows by pushing on with an IPO even as global markets began to teeter last year, but the offering proved to be a startling success.
By this time last year, four Russian firms — Sitronics, Polymetal, Sberbank and Integra — had already raised a total of almost $10.5 billion in IPOs. Yet the first quarter of 2008 has been deafeningly quiet on the Russian IPO front, with not one company braving an initial public offering.

"People are waiting to see how the first one fares," said Stuart Leasor, who tracks IPOs at consultancy firm PBN.

"One always gets the feeling that it is like a floodgate — everyone is holding off until they see how the first one performs, and if it goes well, then they'll be a torrent," Leasor said.

With the values of IPOs by Russian companies increasing by almost 50 percent year on year for the past few years, 2008 is unlikely to match its spectacular predecessors.

The reason for the Russian hesitance is simple: It's all about the financial rout that has been taking place abroad, and, particularly, in the United States.

"It has nothing to do with Russia and everything to do with the current situation in the U.S.," said Ronald Smith, head of research at Alfa Bank.

Now, however, the pipeline of potential listings is bulging, and the next few Russian companies to list should offer good value for money, analysts said.

"The message is loud and clear: If you want to raise money today, it had better be at a clear discount," said Chris Weafer, chief strategist at UralSib. "Its a long time before its going to be a seller's market again."

There is currently around $40 billion worth of IPOs waiting to hit the market, Weafer said. "And if you add RusAl, then that takes it up to around $50 billion," he said.

While RusAl's postponement represented the major casualty of the 2007 IPO rush, other Russian companies seemed able to weather the global storm.

No matter how bleak the outlook or headline-grabbing the postponements, the underlying boom in IPOs by Russian companies has often seemed to carry on unaffected.


Suzanne Plunkett / Bloomberg
London is the favorite for Russian firms, but northeast Asia is creeping up.


Back at the beginning of 2007, when the subprime crisis was just a tear in the corner of Wall Street's eye, bankers and analysts were feeling gloomy about the Russian offerings. Investors' appetites seemed to be waning, and Russian firms no longer looked guaranteed to secure sold-out IPOs.

By Jan. 1, however, it was clear that Russia had posted another record year for IPOs, despite the worsening international financial situation.

In fact, for some Russian companies, the current global situation has even proved a boon rather than a bane for their listings.

Late last year, as global markets began to teeter and uncertainty over the repercussions of the credit crunch peaked, fertilizer producer Uralkali raised eyebrows by pushing on with its offering.

Benefiting from the spare cash burning a hole in the pockets of investors who had been set to spend big on RusAl, the potash giant's IPO was a startling success and proved that fairly priced Russian offerings in smaller sectors would be snapped up. Since listing on the RTS and LSE in mid-October, Uralkali's shares had risen more than 200 percent by March.

Even in the banking sector hardest-hit by the global turmoil, Bank St. Petersburg flummoxed the analysts by launching a domestic IPO in early November. Despite being toward the upper end of its pricing range, the offering ended up seven times oversubscribed. Getting exposure to the booming St. Petersburg market seemed in this instance to outweigh the concerns about the international banking sector's prospects.

With Russia's economy booming due to soaring commodity prices, and apparently irrespective of the international climate, some sectors are particularly attractive. As demand grows, the retail and consumer sectors are set to continue soaring, while construction, boosted by a Kremlin-led charge toward the 2014 Sochi Winter Olympics, also look like a safe bet, analysts said.

As for the trends that emerged in 2007, one of the most striking was the greater apparent sophistication of the Russian IPO machine. Whereas a few years ago public offerings might have seemed like a way for oligarchs to cash out, in 2007, reinvestment rates skyrocketed.

"The amount increased from around 38 percent in 2007 up to 81 percent in 2008," said Leasor at PBN.

Although London remained the prime destination for Russian firms throughout 2007, northeast Asia seems to be creeping up slowly on the outside, and the Russian markets are staking their claim as major international hubs.

RusAl has been rumored to be considering switching to Hong Kong, and another Basic Element metals subsidiary has already confirmed that it is headed to the Pearl River Delta.

At the end of the day, smaller firms seem to think that a domestic listing is adequate, while the big beasts are still being drawn to London.

"The big exchanges are still the place to raise really serious investments," Leasor said.