Since late 2005, Kazakhstan has been the scene of a wave of initial public offerings (IPOs). It began with a splash in October 2005, when Karaganda-based Kazakhmys, the world’s 10th-largest producer of copper, raised £661m ($1.17bn) on the London Stock Exchange, the third-largest company to do so that year. It now trades among the top 50 of the FTSE-100. A month later, Shalkiya Zinc raised $101.5m and KazakhGold Group raised $197m.
Banks joined the fray in 2006. In November, Kazkommertsbank’s (KKB) offering raised $845m, with JPMorgan and UBS Investment Bank acting as joint bookrunners and Kazkommerts Securities the joint global co-ordinator. It was the first significant international equity offering by a bank from a former Soviet state, following a much smaller IPO that KKB made in 1997.
Giant flotation
Then came the giant: KazMunaigaz E&P (exploration and production), the 100% upstream subsidiary of Kazakhstan’s state oil and gas company, last December floated an IPO simultaneously on the London and Kazakhstan stock exchanges, each of which raised about half of the total $2.3bn.
Last but not least was Halyk Savings Bank of Kazakhstan, the country’s third-largest, which raised $748m, also on the London Stock Exchange.
“I expect the current high level of global liquidity to continue this year,” says Jurgen Rigterink, head of ABM AMRO Kazakhstan, the first Western bank to open a branch in the country. “I think this year, Kazakhstani IPOs will have another strong year with some larger listings expected before the summer.”
Allianz and ATF, two second-tier banks, are planning IPOs this year. So too are several non-banking companies, including the aluminium and iron producer Eurasian Industrial Association, which plans to float 25% of its stock this year in London, and the Kazakhstan subsidiary of AES, the largest US international electric power company.
The Kazakhstani economy has been booming for seven years running, racking up an average of nearly 10% a year. So why now?
“On the buyer side, there is a lot more liquidity in the world than there was a few years ago,” says Michael Sauer of Visor Capital, the country’s biggest investment bank and the one that handled the domestic side of the KazMunaiGaz IPO (JPMorgan did the London side). “Commodity prices are high, so economies that depend on them look good now. Kazakhstan looks particularly good, not only because it’s strong in metals as well as oil, but because even if there is a price drop, production increases will offset that, especially in oil.”
Kazakhstan produces 1.3 million barrels a day (b/d) of oil, exports more than one million b/d and is expected to nearly triple its production within 15 years, which will make it one of the world’s top five exporters. At that point, the ratio of oil income to population will be close to that of Saudi Arabia.
Unlike most oil-producers, Kazakhstan is also a major producer of copper, zinc and aluminium and expects to become the world’s largest producer of uranium within a decade.
Political shadow
Political stability is the only shadow. Some investors have expressed concern at the potential consequences of the death or overthrow of president Nursultan Nazarbayev, 67, who has ruled the country with an iron grip since 1989 and who has carefully avoided grooming a successor.
“Even if the president were to pass away, it would be a great loss, but the Kazakhstani economy is mature enough so there will be little immediate effect on capital markets,” says Mr Sauer. “This is one of the most stable emerging markets in the world. The growth outlook looks great. What is there to lose?”
From a Kazakhstani banking perspective, according to Magzhan Auezov, a managing director of KKB, IPOs are all about capital. Banking assets have nearly doubled every year for several years. “And even though our net income is reinvested back into the bank (we have almost never paid any dividends), it is not sufficient to create capital at the speed at which assets are growing. In fact, pretty much all banks are undercapitalised,” he says.
There are only two ways of getting capital: selling shares to a partner or doing an IPO. Foreign banks have been unwilling to meet the Kazakh’s asking prices for shares that do not lead to control. “Nobody wants to sell,” says Mr Auezov. “There are a number of years ahead of substantial growth prospects, so then why release control?”
KKB went to London this year because just two years ago “we were smaller, so it would have been harder to get the same level of interest, and it would have been far less advantageous. On top of that, we need the capital now much more than then,” says Mr Auezov.
With the IPO, which JPMorgan and UBS Investment Bank underwrote and for which they acted as joint global co-ordinators, “the bank will still be owned by the same shareholders”, says Mr Auezov. “But the volume of shares traded will increase substantially and we have doubled our Tier 1 capital, which means that for the next few years, we will have no problem with our capital.”
For Halyk Bank, which started out as the Kazakhstani subsidiary of the old Soviet Sberbank, the IPO represented a sea change in strategy. CEO Grigory Marchenko (who as governor of the central bank implemented key reforms of the banking and financial system) had announced within months of taking the Halyk job that the bank was actively seeking a European strategic partner and was willing to cede a blocking share – 25% plus one – in exchange for help in developing new products and bringing cutting-edge IT technology to manage its branch network. Halyk, the country’s third largest bank, has nearly 600 branches, by far the largest number of any bank in Kazakhstan.
However, Halyk’s main shareholder and a son-in-law of Mr Nazarbayev, Timur Kulibayev, who bought the bank in 1990 and has also acted as the country’s unofficial energy chief, refused to give the buyer a path to control and set a price that no bank was willing to meet, leaving no other option than an IPO.
Positive wave
For André Kuusvek, head of the European Bank for Reconstruction and Development in Almaty, the IPO wave is positive. “It’s opening up capital, improving transparency, getting external investors on board who will ask questions and bring a different view on things,” he says. “Local shareholders will be educated in how to deal with other shareholders, which is important in a country where foreign minority shareholders have not always been treated well. And on a macro level, Kazakhstan will appear in the mental geography of investors and it will be getting a reputation boost.”
Top five banks in Kazakhstan: December 31, 2005 (tenge million)
