Thursday, 18 October 2018

CEE 2006 - Blockbuster marks new Europe

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The CEEMEA region is growing in importance for equity capital markets and is set to be larger than Benelux in 2006. Growth is not coming from traditional markets such as Poland, but from Russia and the CIS which were introduced to many new investors through London listings. The up-to-US$10bn IPO of Rosneft will open a new chapter. Owen Wild reports.

ECM activity has grown rapidly in Eastern Europe, providing banks that cover the region with healthy flows in recent years. However the lack of large attractive businesses meant bankers had to cast their nets widely and deals took many months or years to come to fruition. Volumes were boosted substantially by privatisation activity, but this was also hard to complete, offered low fees and was still limited in number.

The picture has changed substantially in the past 12 months owing to the flow of deals from Russia. By utilising international in addition to local markets, banks have been able to bring companies to market in an environment that has captured the widest possible audience and even attracted investors that would not traditionally have looked at emerging markets.

Russia and the CIS present many more opportunities to investors. There are attractive opportunities and no shortage of companies keen to go public. This has led to a significant increase in focus on CEEMEA by all banks, including those that had previously stayed away from the low fees of emerging markets.

Limited resources and increased opportunities in Russia have ensured that banks established in CEEMEA have also redirected their efforts in this direction. “We are no longer really interested in most of emerging Europe, such as Poland,” said one ECM banker at a house that has been active in CEEMEA for several years. “Our focus is now on the CIS and Russia.”

The fact that a house firmly established in markets such as Poland and Turkey would refocus its resources highlights the opportunity that has developed in a very short time. This is underlined by the lack of activity coming out of most of CEEMEA.

Bulgaria saw its first ever IPO in April as Bulgarian American Credit Bank completed its listing. The deal saw several challenges for lead bank CA-IB as the first fully marketed offering. Primary within this was the restriction that a company must be listed in order to complete a bookbuilt offering. Such restrictions are not unusual, as markets tend to develop more appropriate regulations through activity.

But it is the lack of such issues in Russia that makes it even more attractive. Deal sizes are also a crucial factor, with the BACB IPO totalling just US$68m-equivalent which is eclipsed by even the smallest Russian deals. In recent weeks, bankers have received an RFP for the IPO of Croatia Telecom from the government, but this is a rarity.

"Covering all of CEEMEA is difficult for those who don't have dedicated teams, but there isn't that much outside of Russia," one another emerging market originator. "Activity is currently tending to more marginal countries in the rest of CEEMEA."

It is this which led to the first deal from Bulgaria, with a second from a property company expected before summer and a rare deal from the Baltics. In December 2005, Citigroup led the IPO of ferry company Tallink, but few other names look likely to follow. The only company that is currently considering a listing is Lithuanian retailer VP Markets, which is yet to mandate advisory banks.

A contributing factor to the fall-off in activity from much of CEEMEA has been the significant increase in volumes from Austria. Austria is a gateway between Western and Eastern Europe, which has led many companies to look east for expansion. This has led to several significant transactions, most notably the €2.65bn rights issue by Erste Bank to finance its acquisition of Romania’s Banca Comerciala Romana.

This followed insurer Wiener Stadtische’s €913.5m capital increase in December and deals before that for OMV and Raiffeisen International. Each of these deals tapped into investor demand for more emerging European exposure, while providing the comfort of a stock listed in a developed market.

Austria is unique in this regard, as many companies, such as Wiener Stadtische, offer a pure emerging play. Wiener is the second largest insurer in CEEMEA, but it is behind Allianz which has a much broader presence.

Coming of age

While all of the CEEMEA region is viewed with some caution by investors that do not specialise in emerging markets, they are increasingly likely to participate in Russian deals. This has been boosted by companies such as Kazakhmys, the Kazakh copper miner, which listed on the main board in London. The company went straight in to the FTSE 100 and this helped to raise comfort with Russian/CIS companies.

This will be important for the giant IPO of oil company Rosneft planned for July 2006. The privatisation is set to challenge the possibilities of what can be completed for an emerging market company with a minimum deal size of US$7.5bn.

However bankers close to the deal say that it is highly likely that the deal will raise much more than this amount. Current estimates suggest a figure of around US$20bn, which would make this the largest IPO in history. The final shape of the offer is uncertain as bankers are still working with the company on valuation and how much of the company will be sold.

The challenge of placing such a huge amount of stock has been handed to ABN AMRO Rothschild, Dresdner KW, JPMorgan and Morgan Stanley as bookrunners, but the final syndicate will include many other banks at a lower level. Several ideas are being evaluated to make the deal more digestible, such as multiple listings and Japanese public offer without listing (Powl).

Ensuring that the deal touches as many investors as possible is crucial to its success as there is no natural retail base to take a significant portion of the offer. The deal will be affected by the Russian requirement to place 30% of the stock locally, but drafting of the rules does provide some flexibility in how this can be achieved.

The one aspect of the deal that is certain is the use of international markets for listing. In 2005, several Russian and CIS companies completed IPOs, but listings did not take place on local markets. Instead companies looked to London, as this provided additional comfort to investors, especially in terms of corporate governance – which remains a concern.

The use of London as a listing venue caused the Russian regulator to introduce more stringent restrictions on companies requiring them to have a domestic listing and sell a portion of deals locally. But while firms are able to list through foreign subsidiaries, international listings will continue to be unaffected. The rules are likely to lead to more dual listings this year as a local listing remains the least preferred option.

London and local

The reason to favour London over the local market is clear in many cases because of the additional credibility it provides by being stricter and requiring ongoing and continuous disclosure. However the variety of companies coming to market ensures there will still be a strong flow of new names locally.

“For each Russian company, we look at all the listing options and a combination thereof, including a local listing, the full board in London and AIM, another European exchange and the US,” said Ken Robins, deputy head of ECM at Dresdner KW. “If a deal is likely to top US$250m, the company has IFRS accounts and would appeal to international investors then typically we would recommend the main list together with a local listing if required. If the firm operates in the technology or property sectors then AIM could appeal and for Russian legal entities that are smaller then a Russian listing may make sense.”

The size of the planned listing for Rosneft, even at the low end of expectations, is sufficient to concern some that demand could be severely reduced for subsequent deals. However those that are planning to bring deals in its wake suggest this will not be the case.

"Rosneft will take a lot of attention in the market, but non-natural resources IPOs that follow shouldn't suffer," said Reinout Koopmans, co-head of emerging markets ECM at Deutsche Bank. "We have seen commodity sector deals in Russia and now it is retail. Media deals have started, but we will see more of them. Financials are the next wave."

In the retail sector, Deutsche UFG priced the US$368m IPO of food retailer Magnit on April 27, which will be followed by IPOs for discounters Kopeika and Dixi later in the year. Television company TV3 began pre-marketing for its IPO in April and is expected to be followed to market by others. Financial deals will soon hit the market with Rosbank and Vneshtorgbank scheduled to list in 2006 and Gazprombank the following year.

CIS countries are also considering some ambitious plans, particularly the Kazakh government on privatisation. With commodity-related activity mostly completed, the government is planning the sale of Kazakhstan Temor Zholy, the railway company, which would be its first infrastructure IPO. The government is also considering packaging up a number of its assets into a holding company that could subsequently be listed.

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