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Newsroom / Press Reports More Ukrainian firms to offer stocks out West  March 23, 2006 An increasing number of Ukrainian companies hungry for growth have been seeking outside capital and a public market for their stock and offering their shares to investors as Initial Public Offerings on the Ukrainian stock market. More Ukrainian companies have also been converting a part of their shares or IPOs into Global Depository Receipts – a negotiable, certificate form of the shares that are tradable on foreign exchanges. Doing so gives their shares greater investor exposure and creates an additional source of liquidity. While some investment bankers say that new IPOs issued by Ukrainian companies could number in the dozens this year, dozens of Ukrainian companies already trading on the First Stock Trading System (PFTS), Ukraine’s main trading platform, have listed their stock as GDRs on the Frankfurt Stock Exchange since the beginning of this year, marking a small, unprecedented explosion of Ukrainian equity trading on a foreign market. Brian Best, director of investment banking at Kyiv-based Dragon Capital, said that it is cheaper, faster and easier from a regulatory standpoint for a Ukrainian company to raise equity capital through a Ukrainian IPO issue than placing its shares on a foreign market, unless the company is looking for access to large amounts of capital. “Unless you’re doing an IPO of $200-300 million or more, it makes sense to do an IPO here in Ukraine,” Best said. He said, however, that Ukrainian companies listed on the PFTS can also create DR facilities and list them in a Western market to give investors who can’t buy local shares the ability to trade their stocks. “It’s a matter of getting access to the largest number of investors,” Best said. “And there are a number of Western investors – hedge funds and institutional investors – who, because of their charters, are unable to invest directly in local shares, so they can only buy securities if those securities are registered as DRs.” Best added that a Ukrainian company is not required to have its shares listed in Ukraine to do a DR facility in the West. “It is much better to have the shares listed, but it is not a requirement.” “This [listing on the Frankfurt exchange] is a source of additional liquidity,” said John David Suggitt, managing partner of Concorde Capital, a Kyiv-based investment firm. While Ukraine’s stocks have been hot since the Orange Revolution, liquidity remains low as there are only a handful of popular Ukrainian stocks available. Increasing exposure to buyers out West can boost liquidity, and fuel attractiveness of lower tier Ukrainian stocks, which can be viewed as inexpensive bargains for the riskier end of investment portfolios. “Simply, if you want to sell, there is a better chance of someone else wanting to buy. Very few [investors] see the PFTS. Many see Frankfurt. It’s all about liquidity, and theoretically, more efficient market forces.” Ukrainian companies, overwhelmingly represented by heavy industry, have been spattering their DR listings on the Frankfurt Stock Exchange for the last month. On March 16, for example, the exchange listed the DRs of energy distributor Khmelnyskoblenergo, the Stakhanov ferroalloy plant in Luhansk region and Zhytomyrgaz. Earlier in the month, no less than 10 Ukrainian companies – largely metallurgical, ferroalloy and machine-building plants – received listings for their DRs on the exchange. Similar Ukrainian DR listing activity on the exchange was characteristic for February as well. The Frankfurt listing is also home to the DRs of Tsentrenergo, Ukrnafta, state-owned telecommunications monopoly Ukrtelecom, steel mills Azovstal, Ilyich and Zaporizhstal, Bank Forum, gasoline retailer Halnaftogaz, carmaker LuAZ, chemical companies Dniproazot and Stirol, and power generators Dniproenergo and Zakhidenergo. “Mostly what we are seeing is more companies setting up shop in Germany with a nominal amount of shares in order to allow investors wider access to their stock,” Suggitt said. “Many investors aren't allowed to trade in unlisted companies and thus, once listed in Frankfurt, these investors gain access to the company's shares. Additionally, listing on a foreign market tends to improve these companies’ liquidity,” he added. What’s hot Among Ukrainian share issues that are enjoying high investor interest, Suggitt said that bank issues are currently “very hot,” and include the shares of Bank Forum, Ukraine’s thirteenth largest bank by net assets, “and soon, Mega Bank.” According to an informational memorandum by Concorde Capital, the investment bank is acting on behalf of Mega Bank’s controlling shareholders to sell 20 percent of the bank’s shares, which are to be listed on the PFTS by the end of this month. With 12 branches, 55 operating offices and 103 points of settlement, Mega Bank’s banking network is the eleventh largest in Ukraine, and Concorde Capital said in its memorandum that the bank is looking for greater shareholder capital and foreign financing to assure its further growth over the next three years against a background of recent and future strategic acquisitions in the Ukrainian banking sector. According to the memorandum, Mega Bank’s strategic objectives include reaching capitalization of $500 million, being among the top 20 banks in Ukraine in terms of asset size and increase its network up to 500 units, including branches, operating offices and points of settlement by the end of 2008. “I would say that the LuAZ DR and IPO that we did in January of this year is one of the hottest [issues] right now because it raised capital for the company and was several times oversubscribed,” said Dragon Capital’s Best. Dragon Capital reported Jan. 25 that LuAZ, Ukraine’s second largest automobile producer, raised $26 million from foreign investors in a debut initial public offering of 8 percent of its stock. Dragon Capital acted as lead manager and sole bookrunner for the issue. The placement valued LuAZ at $200 million. European investors bought three-fourths of the issue and U.S. investors bought the remainder. “This is just the onset of the IPO boom Ukraine is about to experience,” said Tomas Fiala, Dragon Capital’s managing director. “There will be at least a dozen more IPOs by Ukrainian companies in 2006.” “Regardless of the heightened political risks, accentuated by the upcoming parliamentary elections in March, Ukraine is firmly on the road to radical economic reforms and integration with the West and its capital markets,” Fiala added. Part of the LuAZ shares sold in the IPO were converted into GDRs and have been listed on the Frankfurt Stock Exchange. The company was also listed on the PFTS. By placing LuAZ, Dragon Capital said that it completed its second IPO in as many months. In December 2005, the bank placed a 10 percent stake in one of Ukraine’s largest retail chains, Velyka Kyshenya, for $27.5 million. Dragon’s Best said that the investment bank was expecting between 10-15 IPOs on the Ukrainian market this year. “I think all of them will be considered hot in the sense that there will be more demand than there will be supply of shares,” he said. The PBN Company, an international strategic communications, government relations and public affairs consultancy, reported in a Jan. 26 statement published on its website that the market value of Ukrainian companies increased significantly in 2005, with the Orange Revolution raising interest in the country in general. “But it is the transparent and fair sale of Kryvorizhstal, the acquisitions of Ukrainian banks by foreign investors and the first successful IPOs at the London Stock Exchange’s Alternative Investment Market (AIM) by three Ukrainian companies that heated up the price for Ukrainian assets,” the report said. One of those three companies was XXI Century, a Ukrainian real estate developer and property manager that raised nearly $140 million by floating 32 percent of its shares on the AIM in December 2005. The offering was six times oversubscribed. The previous successful IPOs of Ukrproduct, a Ukrainian dairy company, and Cardinal Resources, an oil and gas company – which combined raised around $30 million – led to a number of other Ukrainian companies looking to the foreign exchanges to raise money in the coming years,” the PBN report said. It said that a dozen Ukrainian companies publicly stated their intentions to list their shares on the heels of the successful issues, including Velyka Kyshenya, a leading supermarket chain, Donbas Industrial Union, one of Ukraine’s largest financial-industrial groups, and gasoline retailer Halnaftogaz. “2005 saw Ukrainian companies’ first serious forays into the international capital markets,” said Oksana Monastyrska, deputy managing director of PBN’s Kyiv office. “These three companies’ successes, as well as those of other companies from the former Soviet Union, have significantly increased the appetite and the interest of local companies to also make their shares available to outside investors.” Trade by volume Dragon Capital’s Best said that the trading volume for Ukrainian shares is currently about $10 million a day. “About 50 percent of that [amount] is in the form of DRs and the other 50 percent is in the form of local shares,” Best said. “Of the 50 percent that’s local shares, about 70 percent of that is traded on the PFTS and about 30 percent is not traded on an organized exchange. Those shares could be traded broker-to-broker or on other exchanges, for example.” “Gross capitalization of all Ukrainian companies traded could reach $35-40 billion by the end of 2006, with daily turnover in the $20 million to $30 million range,” Monastyrska said. “By comparison, the Polish securities market has a net capitalization of $80 billion and the Czech market is valued at $50 billion.” As for Russia, in 2005, 12 Russian companies raised almost $5 billion by listing their shares in London and Moscow. That’s nearly 70 percent of the total $7 billion raised by Russian issuers since the first Russian company, Vimpelcom, listed on the New York Stock Exchange in 1996, PBN said in a related report. |
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