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. Last Updated: 07/27/2016

Red October Share Offer: Not Sweet Enough?

The Red October chocolate factory's $22 million public share offer, hailed as a revolution in the Russia stock market, has been only a limited success, meeting with total disinterest from the general public, brokers and company officials said Monday.


Although Russia's institutional investors snapped up the shares, the attempt to sell stock to small investors -- effectively in competition with popular high-return investment funds such as Telemarket and Khopyor-Invest -- was a total flop.


"We sold disastrously few shares," said Sergei Fivyeisky, deputy general director of the St. Petersburg Clearing and Settlement Center.


Small investors in Moscow, St. Petersburg and Yekaterinburg bought a mere 16,000 shares out of the 1 million that had been set aside for retail buyers, said Tatyana Nikulshina, a manager with the Grant Financial Center, which conducted the auction.


She said that according to preliminary results, by Saturday, the end of the two-week share issue, Red October had sold less than half the total 3.5 million shares available.


"People want as high a dividend as 200 percent," said Dmitry Zinkevich, an expert with Skate-Press Consulting Agency. "Under the present high inflation, even if Red October had offered 100 percent in dividends, people would not have been interested."


Red October's experience appeared to indicate the low level of interest the ordinary Russian has in buying shares in privatized companies, even when they are blue-chip prospects. Unlike most Russian firms, which had cut their production in the past two years, Red October did well, clearing $20 million last year and $8 million in the first half of 1994. Russian institutional investors, however, responded enthusiastically to the Red October share offer, purchasing all of the 1.5 million shares set aside for them, Nikulshina said.


Yury Danilov, an expert with Guta Bank, which bought some Red October shares, said the bank was attracted by their growing price and by an underwriting program that Grant was offering, in a first for the Russian stock market.


Red October's share price has been increasing since the new emission was announced, and Danilov predicted future growth.


"We are sure Red October share prices will grow, and we like the drive to the foreign market that Grant is undertaking," he said.


Under the program, which was organized under the guidance of the British Know-How Fund, Grant also planned to sell 1 million shares to a foreign institutional investor. However, James Capel, a British investment bank, which at first intended to buy the whole lot, signed a contract for only 122,000 shares, Nikulshina said. James Capel representatives were unavailable for comment Monday.


Another 20 percent of the issue is to be sold to a single strategic investor at the end of January, Nikulshina said.


Nicola Ramsden, head of the Braxton Associates division of Deloitte & Touche, evaluated the results of the auction as "very encouraging," and praised Red October for producing substantial financial data on the company, including the risks it faces.


However she said that while preparing a future share issue of Verkh-Isetsky Metallurgical Factory in Yekaterinburg under the Know-How Fund program, Deloitte & Touche would concentrate more on institutional investors.


"The key issue is to attract an institutional investor," she said. "We do not want to put a share into every babushka's pocket."


Vadim Shirogorov, deputy head of the Urals Stock Center, which only sold 137 shares to small investors during the two weeks of sales, explained the low interest by the lack of indication of Red October's possible dividends or liquidity.


"It is not clear at all when and where one will be able to sell the shares, or how much money he will get as dividends," he said in a telephone interview from Yekaterinburg.


Many brokers said among the reasons for the failure of the public sales was Red October's poor advertising campaign, as compared to those for other companies' securities.


"The main reason for bad sales is very bad advertising," said Sergei Sadovsky, deputy general director of the Moscow Auction Center in Krasnaya Presnya. "As compared to other companies' ads, this was pale, inexpressive and not aggressive enough."


Investment funds such as MMM and Telemarket have conducted slick saturation advertising campaigns on prime-time television.


Although he refused to say how many shares the center had sold, Sadovsky said the results were "quite passive." He said there were many foreigners among the buyers, who bought Red October shares as Christmas gifts, or as souvenirs from Russia.


Tatyana Ramazova, chief specialist with the brokerage Nika, which sold 315 shares, said the minimum purchase amount -- five shares at 20,000 rubles apiece -- was too much money for an ordinary person to disburse at once.


Many brokers also complained that the sales period of two weeks was too short.