IPOs Go Out of Style As Markets Flounder

Just a year ago, the list of Russian companies planning initial public offerings seemed almost endless, but this option for raising additional financing has lost much of its luster, with 45 companies canceling or delaying IPOs so far this year.

And the number may yet rise before the year ends, according to consultancy firm PBN.

Fertilizer producer Acron was the only Russian or CIS company to hold an IPO in the third quarter, leaving others looking for alternative ways to raise capital as they wait for the right moment to test the markets.

A survey conducted by PBN in October turned up a list of companies reportedly canceling or pushing back planned IPOs, including familiar names like Gazprombank, Avtovaz and Mechel.

PBN has since added four more firms to the list: the United Aircraft Corporation, the Grocery Factories of Maxim Antonov, IT firm Compulink and metals and mining business SMR Group.

Stuart Leasor, senior vice president of PBN, said most international companies are having trouble finding financing at present, but the problem is particularly acute in Russia and the CIS.

"You see that even the London and New York markets are not lending to each other," Leasor said by phone from PBN's London office. "The emerging markets are another step up."

Acron's $2.7 million IPO was the least effective yet for a Russian or CIS company in terms of capital raised. By comparison, four other CIS companies raised a total of over $1 billion in the third quarter of 2007.

Because of the financial crisis, most companies would be better off delaying initial offerings, Leasor said.

"If you wanted to do an IPO now, people would think you were desperate for money, and you would get a very bad price," he said.

While the bond market and private equity serve as alternative sources for capital, they have their own drawbacks.

"There is alternative financing around, but it is obviously much more expensive, unless you're lucky enough to get [state aid]," he said.

Of the 45 companies that have changed plans, 34 are said to be postponing IPOs, with the rest canceling completely. Among those calling off offerings altogether are handset retailer Yevroset, telecoms company Megafon and electronics retailer Eldorado.

"In the current volatile environment, an IPO is not the most logical option," said Eldorado CEO Igor Nemchenko. "It is more logical right now to attract a strategic partner, which is exactly what we have done. We have secured a substantial line of credit from the PPF group, which is guaranteeing stable performance."

Russian Railways announced in late September that it would delay share sales for two of its subsidiaries: Transcontainer, a container-freight operator, and RefService, a company that primarily transports perishable goods.

The company is not considering further action until market conditions improve, Russian Railways senior vice president Fyodor Andreyev said.

"We are soberly assessing the situation on the global financial and stock markets and the associated risks of selling stakes in subsidiaries of Russian Railways," he said in a statement posted on the company's web site. "We are not faced with the task of selling these stakes at any price, and we are ready to postpone the transaction to a later date."

Sergei Tikhonov, vice president for investment at Prof-Media, another company on the list, said the holding company also planned to wait until adverse market conditions abated.

"We have always considered an IPO not only a means of raising capital, but also an important stage in the development of our company," Tikhonov said in a statement. "However ... in the current situation, we will only be able to consider an IPO when the financial market shows signs of improvement."

Prof-Media, which owns web portal Rambler, is one of several online media companies delaying share listings. Others include Mail.ru and the country's most popular search engine, Yandex.

The companies that have put IPOs on hold say they plan to wait anywhere from six months to two years. When they do go ahead, most are likely to find the market significantly changed from when they first drew up their plans.

One difference could be a movement away from the New York and London exchanges to a place like Dubai. Another might be stricter vetting processes for prospective companies, forcing some to clean up their books.

"Some of the more traditional Russia structures, I think, are going to be looked at very closely. I think the lenders are going to be very nervous," Leasor said. "When there's not really very much financing around, I think the wise companies will be putting their houses in order."