Press about us

Russian follow-ons market wide open, with Polyus, Alrosa and Detsky Mir in the pipeline

20 November 2017
Mergermarket
Russian follow-ons market wide open, with Polyus, Alrosa and Detsky Mir in the pipeline

The recent deluge of secondary offerings from Russian companies shows little sign of slowing down, as hunger for liquidity drives investor appetite, according to market watchers. Issuers such as Polyus Gold [LON:POLG], Alrosa [MCX:ALRS] and Detsky Mir [MCX:DSKY] were flagged as candidates for further sell-downs.

Russia has had an economic resurgence of late, showing four consecutive quarters of GDP growth after three years of minimal growth or shrinkage. Equity capital markets have benefited from the greater breathing space.

There has been a strong pickup in ECM activity in Russia over 2017, said Dmitry Bolyasnikov, executive director, equity capital markets at VTB Capital. In terms of volume, this year's ECM transactions had already exceeded 2016 by the end of October, he added.

Demand for Russian deals has picked up and we are likely to see more Russian transactions, including follow-on offerings, being done in the future, said Makram Abboud, Vice Chairman of VTB Capital international.

Often the first sign of recovery in equity capital markets is the return of follow-on offerings, an ECM banker said. It's a much quicker and thus less risky transaction than a full four week IPO process, he noted.

The floodgates are well and truly open. Last Tuesday (14 November) alone, around USD 700m worth of shares in retailer Magnit [LON:MGNT] were sold, meat and feed produce Cherkizovo Group [MCX:GCHE] announced it is mulling a share issue in Moscow, and commercial fish producer Russian Aquaculture [MCX:AQUA] set the price range for its upcoming secondary public offering (SPO).

Sector hotspots

Metals and mining has been a hotbed for secondary sell-downs. This year, aluminium company UC Rusal [HKG:0486], steel business Severstal [CHMF:MCX], Polyus Gold, metal miner Norilsk Nickel [MCX:GMKN], metal tube manufacturer TMK [LON:TMKS] [MCX:TRMK] and Magnitogorsk Iron and Steel Works (MMK) [LON:MMK] all put shares up for sale.

Investor appetite is good for producers that have been undervalued for some time, Bolyasnikov said. As investor demand increases, so does the overlap with the price targets of issuers and shareholders, he said.

Further ahead, Polyus Gold is certainly expected to tap the market again to increase its free float, a sector banker said. The company's shares are due to come out of lock-up on 27 December, according to Dealreporter’s European lock-up database. Polyus Gold International owns the remaining 82.4% stake.

Diamond company Alrosa has been mentioned by various bankers and buysiders as a good candidate for a block trade. Alrosa may decide to wait for its share price to go up first, however. It has slid about 23% year-to-date.
Polyus declined to comment and Alrosa did not reply to a request for comment.

The transport and infrastructure sectors have also picked up in 2017, said Peter Stonor, Head of Transport, Infrastructure and Industrials at VTB. “Transport tends to outperform on the bounce, so it is a sector to watch,” he said.

Majority state-owned airline Aeroflot [MCX:AFLT] has had a particularly good run, he said, with the stock gaining 26.5% year-on-year. Crucially the stock has done well in spite of the economic downturn and has tripled since early 2015. It recently completed an accelerated bookbuild at a small discount to market, Stonor said.

Press reports have suggested that further privatisation of Aeroflot does not seem to be on the cards for now, aside from a 3.5% stake owned by the state corporation Rostec. Much of the transport sector in Russia is still under private or government ownership, but companies may look to emulate Aeroflot's success and look to the capital markets as a viable source of liquidity, according to Stonor.

Post-IPOs sell-down potential

A recent uptick in IPO activity could provide opportunities for investors to participate in subsequent follow-on offerings. AFK Sistema [MCX:AFKS] is sitting on handsome gains from its children's goods retailer Detsky Mir's February IPO. Shares are trading at around RUB 110, nearly 30% over the RUB 85 IPO price.

Russia-China Investment Fund (RCIF), which holds around 14%, and Sistema, which retains a 52.1% stake, came out of their IPO lock-up on 9 August. At the time of the IPO, RCIF was planning to hold on to most of its stake for the next three to five years, said Kirill Dmitriev, CEO of the Russian Direct Investment Fund (RDIF) and co-CEO of the RCIF.

Dmitriev had also said in February that RDIF was looking at the possibility of secondary public offerings (SPO) for some of its listed assets. These include PhosAgro [MCX: PHOR] [LON:PHOR] and Magnit, which recently sold shares, and SPO candidates Alrosa and MD Medical Group [LON:MDMG]

The success of Detsky Mir's IPO offers a big opportunity for the RDIF to engage in further pre-IPO investments, privatisations, IPO and SPO transactions, he said.

VTB Capital

Federation Tower West, 12, Presnenskaya emb., Moscow, 123100