Spoilt for choice

Russian IPOs: Russian new issues are set for a comeback. Some $20 billion of Russian share sales are forecast this year, including dozens of initial public offerings (IPOs). Investors should be able to drive a hard bargain.

Following a two-year lull in activity, bankers are excited at the prospect of a return to the heady days of 2006 and 2007, when Russian companies raised some $37 billion in 42 international share issues. Media group Profmedia plans to raise $500 million in April with a London listing, while iron ore miner Metalloinvest and coal miner SUEK are also mulling billion-dollar IPOs in 2010.

Russian flotations have been understandably popular in the past. They tend to be sizeable and offer exposure to high-growth sectors. The Russian stock market is also less expensive than other emerging markets.

But Russian issuers often have inflated estimates of what they are worth. Around two thirds of all Russian IPOs have underperformed the local stock market since issue date, in some cases losing 80 per cent of their value, according to data compiled by Renaissance Capital.

During the last wave of Russian IPOs, sellers had an easy ride, with investors too willing to stump up cash.

This time round, however, the balance of power between buyers and sellers should be skewed in favour of the former. The sheer volume of issues will provide plenty of choice. What’s more, many Russian companies are under pressure to come to market soon. They borrowed heavily before the crisis and need cash quickly to pay off debts.

Uralsib Capital estimates that Russian companies will issue $55.5 billion of equity in 2010 and 2011, of which $17.5 billion is required to repair balance sheets. Profmedia, for instance, is looking to repay some of parent company Interros’s $2 billion debt. Metalloinvest and SUEK are also heavily leveraged. And with local finance still scarce and expensive, smaller and less indebted Russian companies are also need to raise equity to kick-start stalled expansion plans.

Investors will be in a strong position. This time, they can afford to be more demanding when it comes to price.