Tuesday, 11 December 2018

ECM 2006: A kind of magic

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The US$10.6bn IPO of Russian oil giant Rosneft in July was one of the most significant equity deals of 2006. But its background ensured it was also one of the most controversial in history. Although an army of bankers was used, many felt that they were just observers in a process that was being dictated by the Kremlin. Nevertheless, the fact that the deal was done gives hope for a large pipeline. Owen Wild reports.

When the Russian government announced plans to float oil giant Rosneft there was inevitably massive debate about the desirability of such a sale. The IPO was to take place to refinance a loan taken out by Rosneftegaz to increase the state ownership of gas producer Gazprom. Rosneft also grew substantially just before the IPO by acquiring the former assets of collapsed oil firm Yukos.

The cloudy way in which those assets were won in an auction caused significant concern among bankers and investors - particularly as the company was listing in London as well as on the domestic market.

The IPO was always going to be large and the final deal size of US$10.63bn (post-shoe) eclipsed anything seen from emerging European markets, which meant that it would need the participation of a much wider group of investors. But this had to be achieved against a backdrop of concerns about a lack of transparency and continued government ownership that reminded investors they were taking on significant "Russia risk".

On an issue of such importance to the Kremlin and of such a large size, one would expect a lengthy pitching process for lead roles on the IPO. However, in this case all banks participating in the loan to Rosneftegaz were guaranteed positions and fees for the IPO, with the bookrunner roles going to ABN AMRO Rothschild, Dresdner Kleinwort, JPMorgan and Morgan Stanley, all of whom were MLAs on the loan. There were 26 banks in the syndicate.

Prior to launch, the deal was heavily criticised because of the significance of the Yukos assets, accounting for more than half the listed entity. Some institutions felt that the collapse of Yukos underlined the danger of investing in Russian ex-state assets - which, it appeared, could be appropriated at any time - leading them to say they would not participate in the IPO.

But the sheer scale of the deal meant that any emerging market or commodity investor was practically compelled to look at it, and many investors felt that the state's majority shareholding after the IPO would actually be positive, providing protection and stability for the company. And many of those involved in the process argue that even if it was not perfect, it would benefit other deals.

"The success of Rosneft will make it easier to get subsequent deals done," said Charles Lucas, head of Central and Eastern European ECM at ABN AMRO Rothschild. "For example, the pre-marketing schedule saw the joint global co-ordinators cover a massive 339 investors. This introduced not just Rosneft to investors but also Russia, oil and gas. It was therefore an effective road widening scheme for the flow of money into Russia."

This claim is set to be significantly tested by the end of the year with several Russian IPOs of over US$1bn planned, but what was certain from the outset of the process was that Rosneft would be an IPO like no other, with bankers frequently struggling to understand the desires of the seller.

For example, one option included in the structuring of the IPO was for a parallel convertible bond issue. This would offer either the chance to sell stock at a premium if the deal went well or another investor base to take part of the deal if it was less successful. But the leads had little idea whether it would be used.

"If it happens I expect to find out on July 12, when we are told to launch immediately," said a banker at one of the leads at the time. The deal closed on July 13.

Problems with communication were mentioned repeatedly by bankers involved. Sometimes the issue was too little communication while at other times it was multiple conflicting messages. The government also exerted its control over the banks by making frequent demands with short notice. But given the significance of the flotation for the country and for the government - which was just days away from hosting the G8 summit - the tight grip kept on proceedings by the seller was unsurprising.

The leads sourced demand from institutions and strategic buyers, including BP, before the government set pricing at US$7.55, just off the top of the US$5.85-$7.85 range. "We would like to think we had an impact, but we didn't," said one head of syndicate. "The Kremlin had already chosen their number."

This level excluded many traditional institutional investors and heaped stock into the hands of strategic buyers and oligarchs. Pricing at a level above the point at which institutions would tend to buy also led to a fall in the aftermarket, although this has been limited by very little trading. Since floating, the stock has hit a high of US$7.95 and a low of US$7.25, and as of early September, was at around US$7.55.

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