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24 March 2015

Russia still has fans, Lenta’s $225m capital raising shows

That some international investors still have appetite for Russian risk was made clear again on Monday night, when Lenta, the hypermarket group, raised $225m of new capital to finance expansion.

The deal was placed as an accelerated bookbuild after the market closed by Credit Suisse, JP Morgan and VTB Capital – three of the banks that, with Deutsche Bank and UBS, led Lenta’s $974m London and Micex IPO in February last year.

“It went well,” said Elena Khisamova, head of equity capital markets at VTB Capital in Moscow. “The overall feedback was very positive and we got really good traction. We hope other issuers will look at the capital markets now. Russian ECM remains open for good deals.”
Lenta had done a roadshow after its annual results, and considering Russia’s high interest rates, shareholders asked how Lenta was going to finance its development – it wants to open at least 25 hypermarkets this year. Shareholders advised the company to consider a capital raising.
Four anchor investors came into the deal, of which the only one to have declared its name was Russian Direct Investment Fund, a $10bn sovereign wealth fund that co-invests with partners.

“The three others were happy incumbent institutional shareholders that were eager to support the capital increase,” said Khisamova.
Lenta’s global depositary receipts had closed at $6.65 on Monday night, down 2.5% on the day, but up from a $5.33 low in January. They had peaked at $14.30 last July after floating at $10.

The banks launched the sale as a $200m issue and ended up increasing it to $225m and pricing it at $6.40, a 3.8% discount. At that size, the deal was a 7.6% capital increase. The book was closed on Monday night “well oversubscribed”, Khisamova said.

Lenta’s shares traded strongly today, opening well above the previous night’s close and trading up to $6.98, up 5%.

Russian investors, including RDIF, took 35% of the deal, with the rest going to a broad range of international funds, both emerging market-focused and retail specialists.

Russian investors have been prominent in recent Russian ECM deals, partly because some international investors are not buying.

The last substantial Russian ECM transaction was an accelerated bookbuild in early February, when Sergey Galitskiy, founder of Magnit, another retailer, sold 1% of the stock for Rb9.8bn (€128m).

VTB Capital and Morgan Stanley handled that trade, which was designed to raise money for the founder Sergey Galitsky to finance improvements to the stadium of a football club he owns. Russian investors bought 20% of that sale, much more than their typical 5% to 10% share of deals before the present crisis.

Some Western investors prefer not to buy Russian stocks at the moment, taking into account political and macroeconomic risks and oil price volatility. But Khisamova said investors were “not saying ‘don’t show us deals’, they look at them”.

Further ECM deals from Russia are most likely to come from sectors remote from the political hostility between Russia and the West over Ukraine, and from the effects of the fallen oil price. This could include companies in the IT, retail and financial sectors.

Russia’s retail sector had a strong growth story, Khisamova said, with revenue growth for sector leaders of 20% to 30% a year expected in the next three years – though that was in rouble terms. “The consolidation of the market is not finished yet – there is a lot of scope for further acquisitions,” Khisamova said.

Possible consolidators include Lenta, Magnit and X5.

Corporate Communications VTB Capital