Despite the volatile performance of the stock in the secondary market, Vneshtorgbank’s (VTB) $8 billion initial public offering (IPO) in May 2007 blazed a trail for eastern European equity overseas while jump-starting Russia’s local capital markets. But astute mechanics is simply one aspect of this landmark deal. More importantly, it has opened doors for other emerging market banks to launch into developed markets.
The deal was oversubscribed eight times, making it the largest IPO in 2007 and Russia’s second biggest ever. Citigroup, Deutsche Bank and Goldman Sachs were joint global coordinators. Renaissance Capital was bookrunner for the Russia listings.
Crispin Osborne, managing director of CEEMEA equity capital markets at Citigroup, says VTB offers good exposure to the positive macroeconomic story in Russia, hence the strong investor demand. The bank’s assets more than quadrupled from January 2004 to the time of the deal, and at over $52 billion signalled growth of 67% per annum – faster than the overall Russian banking sector.
“This was a scarce opportunity to play the Russian financial services sector with a bank that has strong governance, management and a credible stock market platform,” says Osborne.VTB and the arranger banks managed to wrap up a successful deal despite a difficult backdrop: the RTS (Russian Trading System) index was down 2.7% between the start of the roadshow and the initial pricing of the deal, and it recorded further losses of 2.5% after the first day of trading. By comparison, VTB’s rival, Sberbank, traded up 1.0% over the marketing period.
It was structured as an offering of ordinary shares on the RTS and Moscow Interbank Currency Exchange (Micex) in Russia and Global Depositary Receipts (GDRs) listed on the London Stock Exchange. Its GDRs, each representing 2,000 shares, were sold for $10.56, at the tighter end of the indicated price range $8.77–10.79. A total of 1.5 trillion shares was issued, representing 22.5% of the bank’s capital and giving VTB a market capitalization of $35.5 billion.
The transaction was conducted outside the US in accordance with Reg S to access qualified institutional buyers under rule 144A. Certificates were offered outside Russia that allowed investors a short-term exposure to VTB’s underlying ordinary shares without the difficulties of complying with the Central Bank of Russia’s complex paperwork for buyers of primary shares.
What is so distinctive about this deal is its unprecedented equity distribution compared to similar transactions in Russia. Rosneft’s headline $10.4 billion IPO in July 2006 was swallowed up mostly at home, with only $3 billion offered to international institutional investors.
Sberbank’s $9 billion rights issue in February resulted in $3 billion being bought by the Russian government, $3 billion by existing shareholders and only $3 billion available to new investors.Moreover, retail demand – with 131,000 orders – was blistering, with ordinary Russians camping out overnight to buy shares worth $1.6 billion in total.
Osborne says this landmark deal helped educate individual investors about the opportunities offered by local capital markets. “This deal underscored that there was legitimate retail demand in Russia and stimulated local market interest. This is very helpful in the development of domestic capital markets in the country, since successful privatizations beget a stronger retail market,” he says.
The bank tried to capture the confidence of retail investors in modern-day Russia, which is only now bouncing back after the bank collapses and botched privatizations of the 1990s. “The shares were opened up for retail investors for political reasons. The government used this IPO as a vehicle to try to create a shareholder society, which is a laudable thing,” says one commentator.
VOLATILITY
The positive story was marred just two months later when in July VTB shares traded below their issue price in London for the first time since the flotation. The stock plummeted further on the back of the global market turmoil, investor risk aversion and the blow to the bank’s profitability due to higher costs of refinancing its debt. Almost a year later in early May 2008, the stock trades at $7.90 per share compared with the initial price of $10.56.
“The Russian public who participated in the sale have become disillusioned. This VTB deal has been a clear disaster, it has backfired, and the management now need to go on a public relations campaign,” says Dariusz Sliwinski, emerging markets fund manager at Martin Currie, who refused to participate in the sale at the time.
But bankers involved in the deal argue that as a bellwether, VTB’s stock performance has more to do with global market turbulence than with concerns over the bank’s prospects. “VTB’s more recent performance is not out of line with the Russian financial services sector and is to do with broader, global market conditions,” says Osborne.
But it could be argued that VTB’s transition from a Soviet-era bank to a global market player is still on track. Reinout Koopmans, managing director of CEEMEA equity capital markets at Deutsche Bank, says: “We are already seeing domestic institutions that rely on wholesale funding reduce their lending. As a result, valuations are becoming more realistic, which is helping to consolidate the banking system. In this context, VTB’s retail ambitions will become more achievable,” he says.
Ironically, this ground-breaking IPO has become a victim of its own success. It has provided international investors with a vehicle to capitalize on the country’s growth potential, so VTB is now a means to gauge how insulated oil-rich Russia is from market unrest triggered by events in the West. Yet the bank cannot be blamed for the dogged correlation of global credit cycles.
Koopmans remains bullish on the listing: “The fundamental dynamics of the bank have not changed. As soon as people realize that recent events are an international issue and concentrate on Russia’s macro-story, VTB shares will normalize.”