The flotation of Russian toy retailer Detsky Mir on Moscow’s stock exchange was a significant moment for the country’s capital markets, which have been quiet in recent years. Joanne Hart reports.

Vladimir Chirakhov

The Russian initial public offering (IPO) market has been virtually dormant since 2014, when Western sanctions were imposed on the country following an escalation in the conflict with Ukraine.

In February this year, however, Russia’s largest children’s retailer, Detsky Mir, raised $355m on Moscow’s stock exchange. The IPO valued the group at about $1bn and was widely seen as a watershed for Russia’s capital markets.

Russian for ‘children’s world’, Detsky Mir was majority owned by Sistema, the investment firm chaired by oligarch Vladimir Yevtushenkov. The Russia China Investment Fund (RCIF), part of the Russian sovereign wealth fund, also held a significant stake.

First attempt

An IPO was initially considered in 2013 but was shelved as Russia’s economic situation deteriorated. Since then, Detsky Mir has grown rapidly and, as conditions in Russia improved, Sistema began to consider a second flotation attempt.

“Sistema has a continuous strategy to crystallise the value of its investments and realises returns on its investments. It was an opportune time to partially monetise its stake, given the excellent performance of the company over the past years and strong investor interest in the business,” says Detsky Mir CEO Vladimir Chirakhov.

Given the aborted IPO in 2013, Detsky Mir considered floating in London or New York but ultimately chose Moscow.

“We considered all options, but we were confident that Moscow was the right place for our listing. Over the past few years, the Moscow Exchange has upgraded its market infrastructure so that it is very much in line with global standards,” says Mr Chirakhov. “We understood that the investors we would be targeting were happy and able to trade on the Moscow Exchange. And for a fully Russian business and Russian-incorporated company, we feel the Moscow Exchange is a natural choice these days.”

Credit Suisse, Goldman Sachs and Morgan Stanley were appointed as joint global coordinators and bookrunners, while Sberbank CIB and UBS Investment Bank were joint bookrunners. “The banks were chosen by our main shareholders mainly on the basis of their track record in capital markets transactions and expertise in retail,” says Mr Chirakhov.

Brand recognition

Detsky Mir is the undisputed leader of its niche in the Russian market. A one-stop shop for children’s products, the company has a strong brand, a fast-growing e-commerce business and an ambitious growth strategy. Outside its local market, however, the company is less well known. For the country’s first major IPO in several years, Detsky Mir undertook a comprehensive investor roadshow, visiting the UK, North America, continental Europe and the Nordic countries over a two-week whistle-stop tour.

“Since the process began in 2013, we had already understood that it was crucial to deliver on your announced business plans. Investors don’t like it when you overpromise and underachieve,” says Mr Chirakhov. “I believe that we have managed to handle this task quite successfully. That was one of the reasons why investors believed in our story.”

Detsky Mir’s principal shareholders also chose to retain significant stakes in the children’s business, Sistema holding onto just over 50% of the shares with RCIF retaining a stake of about 13%.  

“Sistema believes that there continues to be significant potential for further value creation. This is why it retains a majority stake and looks forward to participating in future upside. We greatly appreciate that RCIF, our second large shareholder, also supported the deal,” says Mr Chirakhov.

An initial price range of Rbs85 to Rbs105 ($1.44 to $1.78) per share was set but revised down to Rbs85 to Rbs90 in response to choppy market conditions. Ultimately, the price was set at Rbs85, not least because the company was keen to make a successful market debut.

“Investors were impressed with our strategy and financial results. Our company’s evaluation was comparable with the largest Russian retailers,” says Mr Chirakhov. “It was a fair assessment of our business. As a result of our roadshow, the order book was substantially oversubscribed.”

He notes that most of the investors were foreign, from areas including the UK, continental Europe, the US, the Middle East and Asia.

Looking ahead, Detsky Mir has extensive growth plans. It hopes to open 250 new stores by 2020, including 70 this year alone, with several openings scheduled for Kazakhstan, where the group already has 12 outlets. The company is keen to drive organic sales growth, while also expanding its online business.

“We are happy to become a public company. In this new status, we plan to continue delivering further growth of our business and bringing value to our shareholders,” says Mr Chirakhov.


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