Ukrproduct showed that small can be beautiful earlier this year, becoming Ukraine's first company to list internationally. Market players are hopeful that this will spark a trend, although for many company owners the biggest challenge is overcoming the psychological barrier of becoming more transparent and sharing information. Kathryn Wells reports.
Supermodels may not get out of bed for less than $10,000 a day and investment bankers seldom get excited about transactions of less than $100m, but Ukrproduct's £6m listing on London's AIM stock exchange in February grabbed the limelight.
Ukrproduct, one of Ukraine's leading producers of branded dairy products, claimed the distinction of being the first Ukrainian company to list its shares internationally.
The company issued 11.2m shares with a nominal price of 10p and an initial placing price of 53.5p, corresponding to 27.2% of the enlarged shareholder capital post-IPO, putting the company's market capitalisation at £22m.
Ukrproduct will use the proceeds to modernise existing plants and build a new industrial plant to produce hard cheeses. It is Ukraine's market leader in the processed cheese and packaged butter sectors, and also makes dried milk powder products. Around 20% of its products are exported, mainly to Japan, the Middle East and some countries of the former Soviet Union.
A more amenable listing regime than its stringent New York counterpart, and a concentration of emerging markets investors combine to make London an appealing place for companies from the CIS. There are other benefits too.
"AIM is attractive for listings," says Armen Khachaturyan, a partner at law firm Shevchenko Didkovskiy & Partners in Kiev. "Many offshore companies are listed here, and investors know what sort of profile to expect from companies listed in this segment of the market. Listing on AIM is an easier process than the LSE, and eventually, the purpose serves the process."
The listing process took Ukrproduct just under one year from mandating stockbroker WH Ireland to advise it on the listing in April 2004, to placing its stock at the beginning of February.
The floatation should pave the way for other Ukrainian companies to list both on AIM and at the LSE. "In Ukraine, 37 companies already have ADRs," says Khachaturyan. "Until now, all Ukrainian ADRs have been Level One and Regulation S, so that no new capital has been accessed. But, it does help a company raise its profile and is more of a marketing exercise than a capital raising one."
One source of potential IPOs is private equity funds looking to exit their investments. According to Natalie Jaresko, president of the Western NIS Enterprise Fund in Kiev, private equity's traditional reliance on trade sales for exits should now be reduced due to the rising viability of an equity listing. Jaresko expects to see a minimum of two further IPOs this year, and says that at least one of the companies that her fund invests in is in a position to list later this year if they so choose.
Khachaturyan is equally optimistic about the pace of IPOs to come. "We are currently working on a true IPO placement," he says. "Hopefully we should see at least a couple of listings in the next year or two, some of which may be on the LSE rather than AIM. These IPOs are likely to come from trading companies, and from financial industrial groups that have a particular business, such as chemicals or metals, at their heart."
The consumer-related sector in Russia is proving to be one of the most regular suppliers of IPOs in the last 18 months — a trend that looks set to continue as disposable incomes grow. A similar development in Ukraine is likely to yield more sources of IPOs.
But many of the country's industries are too fragmented today to produce companies large enough for IPOs to be realistic.
One such sector is brick making. Demand for bricks is soaring as the construction industry struggles to keep up with the pace of demand for new properties that Ukraine's burgeoning middle class demands.
Slobozhanska Budivelna Keramika (SBK) is the largest manufacturer of ceramic facing bricks in Ukraine. It was founded with the support of the Western NIS Enterprise Fund, and in 2004, SBK's shares were purchased by Austrian investment bank Raiffeisen Investment.
"The company is going towards an IPO step by step," says Alexey Bondarenko, managing partner at the National Investment Alliance, a financial adviser to SBK. "Market consolidation is needed though before this is possible. At the moment the company is not large enough for an IPO, but this should be different in three or four years time. We may require some additional private equity in the case that we pursue an aggressive expansion strategy in the meantime. At the moment, we rely on borrowing from the EBRD, the IFC and other institutions."
But for other companies, it will take more than pure critical mass to convince them of the benefits of equity listings. "The main obstacles to IPOs are psychological," says Khachaturyan. "Shareholders have to decide to open up and share information."
After this happens, it is then the turn of the lawyers to set the process in motion. "Once this is decided upon, the company must be restructured into the most favourable structure for listing," he adds.