Through the successful Asian marketing of IPOs for Russian property developers Sistema-Hals and PIK, Nomura’s Moscow operation has managed to position itself as a gateway to ‘eastern’ investors.Edward Russell-Walling explains.
There was a time when Asian investors, if they invested outside their region at all, confined themselves to US Treasuries. That time has passed. They are developing an appetite for eurozone and European emerging markets securities, and Nomura believes it is in prime position to deliver them to issuers.
Nomura (left to right): Salim Salam, Kenichi Tsukamoto, Michael Boardman, Marcus Le Grice and Myles Evanson and David Gilbert
It has proved as much with a string of recent deals out of Russia where, in April, it opened a Moscow office, headed by general manager Maxim Selzer. A year before the Cyrillic brass plate went up, Nomura handled a small private placement for Angara Mining, a UK-registered company that produces gold in Russia. Though it raised only $50m, the structure was innovative – it was the first-ever pre-initial public offering (IPO) convertible bond for a UK issuer. But the real surprise was that 70% of the deal was placed with Asian investors.
Word of mouth
Russia may be a big country, but its financial/industrial elite is pretty small. To them, word of mouth is just as important as the league table – probably more so. And word on the Angara deal quickly got out to the Yevtushenko family, who control Russia’s largest consumer services company, Sistema. They were contemplating a separate IPO for Sistema-Hals, the listed group’s property arm.
Nomura seized the opportunity to articulate its Asian vision. In a nutshell, the bank argues that the explosion of wealth in the region has turned Asia from a net importer of capital into a net exporter. Investor sophistication has grown along with the new wealth, and this has led to growing demand for foreign assets.
“Russia looks east as well as west – in fact, most of the country is in the East,” says Marcus Le Grice, Nomura International’s London-based head of equity capital markets (and a former head of Deutsche Bank’s equity transaction group). “Russians feel that nexus in a way that Europeans don’t.”
Nomura’s argument struck home and it was awarded a mandate as joint global co-ordinator and joint bookrunner for Sistema-Hals’ November 2006 IPO alongside Deutsche Bank and UBS. By then time was running out and the team was not physically able to market the transaction on the ground in Singapore, Hong Kong or Tokyo. Even so, $200m of the $400m raised by the offer came from Asia.
“Investors in Tokyo, Hong Kong and Singapore differ from each other, so we adopted a tailor-made approach,” Mr Le Grice explains. “One reason why that had never been done before was that the bulge bracket firms [major investment banks] didn’t recognise the need for a difference of approach.”
By now, Russian tongues were really beginning to wag. Unlike Angara, Sistema-Hals was a public deal and put Nomura as a gateway to Asia rather more visibly on the map. “The family was happy, recognised the uniqueness of what we had delivered, and Russia suddenly started to talk about Asia,” says Mr Le Grice. Having done one property deal, the team started to focus more intently on the sector and soon uncovered another likely prospect, in the shape of PIK.
Housing specialist
PIK is a fast-growing residential property developer, concentrated in the Moscow region, but expanding into other parts of Russia. It specialises in large high-rise developments, aimed at middle-income Russians. Unusually, it is vertically integrated to the extent that it produces many of its own raw materials, such as gravel and sand, as well as making its own prefabricated concrete panels and window frames. This, it believes, gives it an important edge over its competitors in a housing market that Russian president Vladimir Putin has promised to expand.
It was in November 2006 that Nomura’s Mr Selzer started meeting PIK’s president and 50% shareholder Kirill Pisarev to talk about an IPO in London and Moscow. Morgan Stanley had been working on it with PIK since September and was given a mandate in December.
“Mr Pisarev had checked with Sistema, who said that we had delivered what we promised, though we couldn’t even go to Asia,” says Michael Boardman, managing director, equity capital markets at Nomura. “We did some work on the valuation and we noted that, if you used comparables in Asia and Latin America, the valuation was higher.”
Morgan Stanley and, later, Deutsche Bank – awarded an IPO mandate in February – had originally come up with lower valuations. Mr Le Grice argues that this was because they were using Russian or even US-inspired comparables. Yet Asian investors, he insists, have a more realistic idea of what such a business is worth.
“They have a different perspective on high-rise, mass residential housing development,” he says. “If you live in Hong Kong or Singapore, you look out of your window and that’s all you see. In fact, you probably live in one.” So, he elaborates, Asians understand about using concrete slabs to build efficiently and fast, they understand about emerging market property growth and, as investors, they are willing to pay for it.
Value speaks to Russians, as much as it does to anyone, and Nomura finally won its mandate as joint bookrunner in March, after wooing PIK’s management on a premarketing – pilot fishing, as they say – trip around Asia. It was definitely the junior partner, invited to underwrite 20% of the deal, while the other two banks underwrote 40% each. Needless to say, the fees would be dished out in similar proportions, though incentives were built in for actual performance. “There was a perception in the transaction that Nomura was offering less,” Mr Le Grice observes.
So be it. The roadshow began in May, offering 15% of PIK at $25-$31 a share, to raise $1.8bn-$2.3bn. The show opened in Singapore. “Within one day we had orders – price-insensitive orders – out of Asia for $550m,” says Mr Boardman.
That was just as well, since it was to be a torrid fortnight. Property yields around the world were coming under pressure, which did not help. A hike in Chinese stamp tax sent the Shanghai market into a spin, and other emerging markets with it – such as Moscow, which fell by more than 9%. If that was not enough, a series of Russian property IPOs had blunted the market’s appetite for yet another. The most recent, AFI, had been brought to market by none other than Morgan Stanley and Deutsche Bank (with Goldman Sachs).
While the initial offering had been hugely successful, AFI’s share price had since fallen by 20%. Potential buyers of PIK were not too impressed.
Exceeding expectations
Nonetheless, the Nomura team gave it everything they had. “This was not a cookie cutter deal for Nomura – it was a franchise transaction,” says Mr Le Grice. “And we outperformed expectations, on a global basis.”
The issue was finally priced at the bottom of its range – at $25 per share, valuing PIK at about $12.3bn. Price notwithstanding, it was still the largest-ever IPO in the property sector for Europe and indeed – barring real estate investment trusts – the world. On top of that, it was the largest non-financial equity transaction of the year to date, anywhere.
And Nomura kept its promises. The valuation was in line with its apparently ambitious prediction. A full 30% of the offering went to Asia, an unprecedented level. “The shares were successfully placed with good quality investors – very few hedge funds – who didn’t flip,” says Mr Boardman.
By mid-June, the shares were still trading at around their issue level but, given that Russian comparables were down some 9% since PIK’s pricing, being flat was no bad achievement. The Nomura team has every intention of building on it. “We hope to carry on delivering Asia for Russian clients,” Mr Le Grice concludes. “And we hope that the word of mouth continues.”
