Insightegy Consultants

IPO’s are booming in Russia. But there are still some effective companies been not listed. Understanding the reasons for avoiding stock market can create an opportunity for a foreign investor as an alternative.

Russia became the leader of the European IPO/SPO sphere in 2007. According to research carried out by the PBN Company, there were 23 public offerings in Russia in 2007 with a total sum of €21.4bn, outpacing Great Britain with €16bn and Germany with only €8bn.

Many of the traditional reasons apply for Russian IPO’s; while the economy is growing, competition is increasing, driven both by local and international players. Russian companies lack financial resources due to the high cost of bank credit in Russia and world liquidity crisis. A more pressing question is why some private companies, even those of the top ten by turnover are still not using IPO, postponing or even rejecting it. Generally the reasons can be divided into several groups:

  1. Some companies postpone the IPO due to uncertainty and slow-down on financial markets. Investors’ money flows out of stock markets, thus booming demand may not meet the necessary money supply to cover its intentions. This tendency creates additional IPO risks. E.g., metallurgy giant RUSAL postponed its ambitious IPO (about €3.4bn) and probably shifted it from London to Hong-Kong due to both the financial market crisis and new listing rules on LSE.

  2. Some companies claim they do not need IPO or even find it value-breaking. E.g., The Russian cement market leader (about 40% market share) Eurocement rejects IPO and insists it can grow with bank crediting only. Being a monopolist in several regions on one of the basic goods in a rocketing construction industry, Eurocement managed to raise its prices several times, reaching 20-30% profitability. Accumulating significant retained profit, it can raise bank loans at favorable rates, because their credibility is proven by excellent performance and market leadership.

  3. Fear of losing control, while distributing the shares in the open market is a common fear of many Russian managers. Timber holding “Ilim Pulp” preferred to invite a strategic investor (“International Paper”) to IPO in their managers’ concern about an unfriendly takeover. The idea of a foreign “White Knight” might still be popular as opposed to local “Grey” and “Black” raiders.

  4. Some firms can’t meet listing requirements neither abroad nor even in Russia and need deep transformation in spheres of accounting, management and business organizations. Such tails of the past as “grey” imports and salaries, “creative” accounting and window-dressing make their business absolutely nontransparent for a potential investor. And many Russian companies seriously lack both the financial and managerial resources to implement the necessary changes.

Companies still being not listed are often significantly undervalued. Their need for financing as well as business transformation creates big opportunities for private equity funds on Russian market. But those opportunities are limited in time. Both free market development trends and government policy push companies towards more civilized forms of financing and types of ownership.