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. Last Updated: 07/27/2016

IPOs Luring Western Bankers

Vedomostiladimir Yevtushenkov
Morgan Stanley and Credit Suisse First Boston led banks that split almost $30 million of fees for managing Sistema's initial public offering, Russia's biggest ever.

Sistema, billionaire Vladimir Yevtushenkov's holding company, paid the six banks managing its $1.56 billion IPO earlier this month a 2 percent fee, according to a sale document released last week. Morgan Stanley and Credit Suisse also shared an additional $2.7 million payment, the filing shows.

Wall Street's biggest banks, which lost billions after Russia defaulted on domestic debt in August 1998, are returning to the region after the longest period of growth since the fall of the Soviet Union. Sistema's IPO may help Morgan Stanley and CSFB win a share of the $4 billion of initial public offerings that Russian companies are planning in the next 12 months.

"Getting a deal like that sets the bar," said Tim McCarthy, who manages $620 million at Troika Dialog Asset Management and bought Sistema shares. "The next time someone in Russia is looking to raise $1.5 billion, they are going to look around and see who has the experience, and these banks are going to benefit from doing this deal."

Banks are turning to IPOs by private companies in Russia and Eastern Europe to increase revenue as competition cuts fees for one of their most lucrative assignments in Western Europe. Compared with IPOs of the same size in Western Europe, the fees paid by Sistema were higher. French highway operator Societe d'Autoroutes Paris-Rhin-Rhone paid a 1.6 percent fee for its $1.6 billion IPO in November.

"Russia is a difficult place to do business and you have to get paid for it," said Mark Martin, managing director of equity capital markets at ING Investment Bank in London.

ING managed the initial public offering for Russian companies Mobile TeleSystems, Wimm-Bill-Dann and Open Investments, making it the largest by mandates in the country. Mobile TeleSystems and Wimm-Bill-Dann received listings on the New York Stock Exchange.

"We are feeling a lot more competition from the bigger banks," Martin said. "This will be a very good year and the big boys are throwing themselves at the market."

The Sistema fee is still about half what companies in the U.S. pay for an IPO of a similar size. Citigroup, Goldman Sachs Group and J.P. Morgan Chase & Co. earned a 4.25 percent fee managing Austin, Texas-based Freescale Semiconductor Inc.'s $1.6 billion stock offering last July.

Morgan Stanley spokesman Erik Portanger and CSFB's Rebecca O'Neill both declined to comment. A spokesman for Sistema in London also declined to comment.

"There is likely to be something of a feeding frenzy as some of the first generation of oligarchs seek to take some cash out while valuations on Russian companies look quite appealing by comparison with European levels," said Eric Kraus, chief strategist at Sovlink Securities in Moscow. "The international banks will be vying for mandates."

Billionaire Viktor Vekselberg, who controls SUAL Group, said last year he may sell shares of Russia's second-largest aluminum producer to the public.

Before Sistema's IPO, Mobile TeleSystems' $370 million initial offering in July 2000 was the biggest by a private Russian company, according to data compiled by Bloomberg. Investors ordered more than 2 1/2 times the stock available, Andre Bliznyuk, Sistema's head of investor relations, said earlier this month.

The IPO is the first Morgan Stanley has led for a private company in Russia. The firm previously advised on Gazprom's 1996 share sale and the Russian government's offering of a $775 million stake in LUKoil in December 2002. Credit Suisse was the top arranger of share sales in the former communist bloc last year, according to Bloomberg data.

The sale also helped CSFB, the investment banking unit of Zurich-based Credit Suisse Group, rise from sixth position and draw with Morgan Stanley as Europe's top manager of share sales in Europe so far this year, Bloomberg data show.

"This enables them to say 'we are here and still capable of bold and big things,'" said Alexander Schwarzkopf, who manages $1.3 billion at Altima Partners, a hedge fund in London.

Banks that helped manage Sistema's IPO include Deutsche Bank's Moscow unit United Financial Group, ING Financial Markets, Renaissance Capital Group and Troika Dialog.