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Comment by Dmitry Bolyasnikov, Executive Director, Equity Capital Markets at VTB Capital, for MergerMarket

23 August 2016
Mergermarket
State-led follow-on offerings to drive choppy Russian ECM activity

Proprietary Analysis
  • Investors prize liquidity, yield, index membership
  • RussNeft, Detsky Mir, Sovcombank in IPO pipeline
  • September/October seen key window for offerings
by Sofia Cerqueira in London and Sergey Kolyada in Moscow

Governmental privatisation efforts will likely be the main driver of activity in Russian equity capital markets (ECM) as international investors slowly warm to local issuance, bankers say.

International participation has edged up, having accounted for 45% of stock trading on Moscow Stock Exchange (MOEX) in the first half of this year, up from 40% in 2013, Andrey Braginsky, MOEX’s managing director of communications, said. Almost all international investors who are following the Russian market are now set up to trade locally, Dmitry Bolyasnikov, ECM executive director at VTB Capital, added.

Deal flow has been patchy amid turbulent geopolitical and macro conditions, but more deals like the recent USD 816m sell-down of a 10.9% government stake in miner Alrosa [MCX:ALRS] are expected to fuel activity on the exchange, bankers said.

State holdings in oil producers Rosneft [MCX, LON:ROSN] and Bashneft [MCX:BANE] are the key assets in the pipeline. The Russian government owns a 69.5% stake in Rosneft via state-owned Rosneftegaz, with a partial sell-down expected to bring in about RUB 700bn. The privatisation of the 50.1% stake in Bashneft has reportedly been postponed until at least Rosneft’s is completed.

The timing of Bashneft’s privatisation depends on a “policy decision,” a spokesperson at the Ministry of Economic Development and Trade said. In theory, the ministry is ready to conduct the privatisation at any time – both in late 2016 or in 2017, the spokesperson added.

The state-owned stake in Bashneft has been valued at RUB 306bn (USD 4.7bn) and has received interest from several strategic players including Rosneft, Lukoil [LON:LKOH], Tatneft [MCX:TATN], Independent Petroleum Company (NNK), Taneftegaz, Antipinsky Oil Refinery, Fund Energy and the Russian Direct Investment Fund (RDIF), according to reports.

All five Russian ECM transactions completed on the Moscow Stock Exchange year-to-date have been follow-on offerings, which is a likely consequence of choppy markets, noted Braginsky. “SPOs can be completed more quickly and require less lead time than IPOs,” he added.

“Nonetheless, there is a robust pipeline of potential deals for once the timing is right,” the spokesperson said, noting there could still be at least one IPO before year-end. September-October will present the key window of opportunity for the Russian market, a local banker said. Success cases in the government’s privatisation agenda will also open the door for private companies considering a listing, a second local banker added.

Despite seeing the bulk of activity coming from the natural resources and energy space, there could be other sources of activity, noted the first local banker. The flotation of Detsky Mir could be the biggest deal in the pipe, he said. AFK Sistema [MCX:AFKS], Detsky Mir’s parent company and 73% owner, is interested in floating the children-focused retailer at a peak price, and it can reasonably aim to get it in a September or October listing, he added. Sistema declined to comment.

Previous local reports pointed to a potential March 2017 IPO. In late 2015, Sistema sold a 23.1% stake in Detsky Mir to Russia-China Investment Fund (RCIF) for RUB 9.75bn. Goldman Sachs could also become an investor in Detsky Mir, reported Vedomosti citing Vladimir Evtushenkov, chairman of the board and main shareholder in AFK Sistema.

Quality names, which tick investor "high-conviction” boxes such as liquidity, a well-articulated business model, strong management team, dividend yield and stock index potential membership, will have good chances of tapping the market in the short-to-medium term, VTB’s Bolyasnikov said.
Other IPO candidates that could join the stock exchange include private firms such as oil & gas supplier RussNeft, online retailer Ulmart, and Sovcombank, and state-owned shipping company Sovcomflot.

The government reportedly plans to achieve RUB 24bn (USD 366.6m) from the sale of a 25% stake of the USD 1.24bn revenue shipping firm, according to local press. VTB is the sole arranger.

Sovcombank aims to place a 25% stake on the Moscow Exchange, the bank’s co-owner and Deputy CEO Sergey Khotimskiy said in June, with two sources adding a deal could happen by 4Q16.

RussNeft has reportedly mandated VTB and Sberbank, among others, to conduct a deal possibly by year-end too. The oil & gas firm, which is controlled by the Gutseriev family and minority held by Glencore [LON:GLEN], could see its debt load weigh on the equity story, bankers told this news service. Recent reports pointed to plans to convert debt into preferred shares to reduce leverage. Russneft is looking to float up to a 10% stake to raise USD 400m-USD 500m.

Ulmart is technically ready for an IPO, having mandated UBS and JP Morgan among others, but will likely wait as it considers other options such as a minority stake sale to an international strategic buyer, Chairman Dmitry Kostygin told this news service earlier this month.

In the second half of the year, investors will be primarily focused on US elections, Brexit follow-on effects and economic growth indicators in the key markets, VTB’s Bolyasnikov said. “ECM activity is primarily driven by investors’ appetite for risk, which in turn derives from major macro and geopolitical events. We can see a number of indices are touching record highs so we are looking at sustaining earnings momentum at the corporate level and hope seeing global GDP – particularly emerging market GDP - tick up slightly in 2017 and 2018”.

Growing foreign interest could go along an increasing share of Russian domestic demand, which has been anchoring support for deals brought to market, he added. “We do think that we will be seeing more MOEX-only listings for a number of reasons”, Bolyasnikov said noting the infrastructure has substantially improved in the last couple of years, becoming more convenient both for issuers and investors.

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