President Viktor Yushchenko is locked in a battle for power with his nemesis from the Orange Revolution, Viktor Yanukovych – and is losing. But the economy has not been affected by the tussle for political power and is roaring ahead. A wave of Ukrainian initial public offerings (IPOs) is expected to hit the market this year as domestic companies look for investment funds and find the cheapest option is to tap western capital markets.
The Ukrainian IPO market sprang to life at the end of 2004 after hydrocarbon company Regal Petroleum floated. Since then, IPOs began to trickle onto both the domestic and international markets. Next up was another oil company, Cardinal Resources, which is listed on the London Stock Exchange (LSE) and has a market capitalisation of $40m. However, the float of real estate company XXI Century was a watershed as the first IPO that gave investors exposure to the increasingly vibrant consumer spending story in Ukraine. XXI Century raised a whopping $140m by selling 35.7% of its shares on the London Alternative Investment market (AIM) in 2005.
Since the Orange Revolution two years ago, about 20 small and medium-sized enterprise have raised money by issuing shares. AIM has been a popular venue for Ukrainian IPOs, but Astarta-Kyiv, one of Ukraine’s biggest sugar producers, broke the ice on the Polish bourse, raising $30m for a 20% stake on the Warsaw stock market in the final quarter of 2006.
At the same time, the number of IPOs has been matched by an equal number of private placements. Given the unreformed state of Ukraine’s financial markets and the small number of institutional investors investing in the market, analysts say that there is little difference between a formal IPO and the private placements of the past two years.
“Private placements with a stock listing do not differ much from IPOs in terms of information disclosure and placement procedures, as they are often marketed to a wide range of institutional and private investors,” says Andriy Dmytrenko, chief strategist at Dragon Capital in Kiev.
Flotation wave
The wave of flotations is expected to build this year: analysts say that about 60 companies have either announced plans for an IPO or are expected to float in the next two years. The attraction of equity as an asset class was given a fillip by a “monumental” new investment law introduced by the government in March last year to replace the previous version that had been in place since 1991. The new comprehensive law includes sections on better disclosure, regulates against insider trading and introduces procedures for IPOs. It also introduced more sophisticated financial tools, such as convertible bonds and real estate certificates, and was widely applauded by fund managers and investment bankers.
But the main driver for more IPOs remains companies’ need for cash to ride the accelerating pace of growth. Ukraine’s economy has been on a see-saw thanks to the dramatic politics in the country. GDP growth soared to more than 12% in 2004 only to plunge to a little under 3% following the Orange Revolution, as businessmen put investment plans on ice. However, last year the economy rebounded and put in a robust 7% growth in 2006, according to preliminary results, while real disposable income was up 16% and retail turnover rose a massive 25.3% year-on-year in real terms.
“After the Orange Revolution, Ukrainian companies started looking west,” says Nick Piazza, an analyst at Concorde Capital in Kiev. “The problem is if a company needs $100m, it can’t raise that kind of money on the domestic market so it has to go abroad. And they were pleasantly surprised to find how cheap this money is compared with the cost of capital in Ukraine. It led to some very high valuations. But everyone realised that you have to leave something for the investors because it is easy to get a bad reputation in what is still a small pond.”
The valuations of Ukraine’s leading PFTS index have more than doubled each year for at least the past three years, and daily trading volumes rose by more than 300% in the aftermath of the Orange Revolution in 2005 to a total of $700m for the year. The market’s index broke record highs nearly every day during the last days of trading in 2006 and has got off to a strong start in the first weeks of trading this year, too, smashing through the psychologically important 500 mark in the first week of January.
“Owners of most of these companies sold 8%-20% stakes, using the proceeds to finance concurrent share capital increases, thus reinvesting the proceeds,” says Mr Dmytrenko at Dragon, which is one of the most active brokerages, completing 10 IPOs by November worth a total of $344m.
Retail needs finance
Ukraine’s retail sector is hot at the moment, and the fast pace of growth puts huge pressure on companies catering to domestic demand to expand as fast as they can to grab as much market share as possible from the burgeoning competition. The trade-off from selling shares cheap now but using the funds to grab more customers is increasingly outweighing the temptation of hanging on to shares now and selling them for more later.
LuAZ is the leading Ukrainian automobile producer with $200m in sales in 2005. It sold 8% in January 2006 to raise $26m as part of a larger capital-raising programme to finance a major capacity upgrade in an effort to meet the demand for cars, which soared by a third last year.
Velyka Kyshenya, one of Ukraine’s largest food retail operators, holds the record for the largest IPO on the domestic market: it raised $27.5m by selling a 10% stake in December 2005. But it was more of a private placement than a true IPO, say analysts. Now the company is considering a placement on the LSE this year to raise the $50m-$60m it needs to increase the number of its supermarkets from 21 to 100, and so raise its market share from 10.5% in 2006 to reach its goal of 30%. Part of the reason why it is looking to London is because $50m is a huge loan for most Ukrainian banks and would be equally expensive for the borrower.
“Local banks can’t cope with a sum over $100m,” says Mr Piazza. “If a company needs to raise this much, the only place they can find this kind of money is on a foreign stock exchange.”
More recently, companies such as Myronivsky Khlibproduct, a Ukrainian agriculture and food holding, announced in December that it intended to tap international equity markets with an IPO. Yuriy Kosyuk, the company’s chairman of the board, said the company would place about 20% of its shares, worth an estimated $150m, on the main section of the LSE this spring.
The banking sector is another candidate for IPOs this year. So far, apart from a few private placements, such as Bank Nadra, there have been no formal banking IPOs. As in the retail sector, banking sector growth has been running white hot for more than 18 months and banks are becoming increasingly desperate for capital. One of the top five Ukrainian banks, Ukrsotsbank, had to briefly suspend its lending activity last summer after its capital adequacy ratio fell dangerously low. Almost all the owners of banks have been injecting big dollops of fresh capital to keep the growth up, but this has only bought the banks a year, maybe two, of breathing space; many of the biggest names have already announced IPO plans.
“The IPO route was a natural choice for fast-growing local banks such as Ukrinbank and Rodovid Bank, which have ambitious management looking to capture a greater share of the fast-growing retail lending segment,” says Mr Dmytrenko. “Registered in Cyprus, IMB Group opted for a private placement [in 2006], rather than a London or Frankfurt listing, due to time constraints, because an IPO abroad would have taken much longer and cost the company a great deal more in fees.”
Awaiting the oligarchs
However, the real excitement over Ukrainian IPOs will come in about 18 months’ time, when the leading industrial groups begin to raise billions of dollars on the international markets. Serhiy Taruta, CEO of leading metallurgical company the Industrial Union of Donbas, was the first of the country’s oligarchs to announce concrete plans for an IPO last January, when he told journalists that the company wanted to float on a foreign stock exchange this year.
The IPO plans of Systems Capital Management (SCM), the holding company of Ukraine’s richest man, Rynat Akhmetov, who is reportedly worth $11.8bn, are now also well advanced. With interests in pretty much everything of note in Ukraine, Mr Akhmetov has been taking the company through a comprehensive restructuring to improve transparency and group like businesses with like in preparation for the flotation.
In late 2005, SCM reorganised all its energy holdings into the Donbass Fuel-Energy Company Association (DFEC), while the metallurgical assets – the source of Mr Akhmetov’s wealth – have been grouped under the Metinvest holding, created in June last year. Analysts say that SCM has made great strides in improving its transparency and expect SCM to IPO both these holdings separately.
