Tuesday, January 25, 2005
Broader, Deeper
January 24, 2005 - James Fenkner Special to Russia Profile
Troika Dialogâs forward equity placement and debt-financing calendar charts Russiaâs evolution towards a broader, deeper market. New equity financing, which we define as including strategic purchases, placements and IPOs, is expected to reach $9.7 billion in 2005. Not all of this supply will flow to the secondary market, but much of it may. Total equity financing of $34 billion through 2007 represents 15 percent of Russiaâs current market cap of $221 billion.
For 2005, most expected equity placements will come from the faster-growing and more under-represented industries. Remarkably, the largest sector, oil and gas, is not expected to gush equity placements in 2005. The still restructuring utilities are not likely to generate much in this line, either. Instead, in both absolute and relative terms, the telecom sector is set to dominate, with more than $6.1 billion in expected equity deals. The metals sector comes a distant second with $2.0 billion, and banks are expected to make a $1.0 billion-plus debut. The remaining $800 million is to be raised within the manufacturing, consumer and retail, transport and chemicals sectors. Such volumes look modest, but they are quite substantial on a relative basis for these less-liquid parts of the market.
Through 2007, the equity placement picture changes somewhat, with oil and gas, together with electricity, picking up some of the slack. In the next three years, we expect $19.4 billion in oil and gas equity placements. These are the largest absolute volumes, representing more than 16 percent of the sectorâs market cap of $124.7 billion. We may also see $800 million in electricity placements, which, however, will constitute only 4 percent of that sectorâs market cap of $21 billion. In relative terms, Russiaâs fast-growing consumer sector is expected to issue the most through 2007, in excess of $1.6 billion, or 38 percent of its current market cap of $4.3 billion. We expect the metals and telecom sectors to be the second and third most active in equity placements during this time, with a respective 23 and 21 percent of their current market caps.
The debt-issuance picture is similar to that for equity placements through 2007. In absolute terms, the oil and gas sector dominates, with $13.3 billion. On a relative basis, consumer and metals are again at the top of the list. Consumer sector debt issuance of over $1 billion would represent 166 percent of the sectorâs current net debt. For metals, the respective figures are $3.9 billion and 152 percent.
A closer look at the future equity and debt activities of each Russian sector yields a number of important conclusions.
Oil and gas: For oil and gas equity placements, Sibneft is the wildcard. While we expect a $14.4 billion strategic transaction in Sibneft by 2007, the fluid nature of Russian oil politics could play havoc with this timetable. On the debt-issuance side, Gazprom is king, even a Sovereign proxy. We expect it to sell more than $9.5 billion in debt through 2007, representing over 70 percent of the sectorâs total issuance and a third of all Russian corporate debt placements.
Electricity: Restructuring keeps Russian utilities out of the placement limelight through 2007. Indeed, the federal âgencoâ auctions in 2006 and 2007, worth upwards of $400 million each, may mark the early stages of equity-placement activity. We expect only $1.9 billion in debt issuance through 2007, mostly by UES. The sectorâs total debt issuance represents a bare 9 percent of its market cap, the lowest ratio in Russia. Compared with global utilities, Russiaâs are woefully under-leveraged.
Telecom: This is the star equity issuer of 2005. Of the five major deals expected in 2005, the privatization of Svyazinvest is clearly the most important, not only in terms of size ($3.6 billion of the sectorâs $6.1 billion in equity placements) but also as a means of reiterating Russiaâs political commitment to private ownership and revitalizing the countryâs largely dormant fixed line sector. We expect all of Russiaâs fixed line super-regional operators and currently traded mobile providers to tap debt markets through 2007, to the tune of almost $3.4 billion.
Metals: Next year will be an important year for Russiaâs metals, too. With $2.0 billion in projected equity placements, this sector comes second only to the telecom sector. We anticipate large gold, steel, titanium and aluminum equity placements in 2005. On the fixed income side, the Russian metals sector is gearing up but from an extremely under-geared base.
Manufacturing: Every large Russian manufacturing company (except the largest, AvtoVAZ) is likely to be involved in equity transactions in 2005 to 2006. The sector is also expected to raise $950 million in debt through 2007. While small in absolute terms, this makes up 38 percent of its market cap, the highest ratio among the sectors.
Consumer and retail: In the next three years, at least 14 consumer and retail companies may come to market, more than in any other industry. On a relative basis, consumer and retail is expected to be Russiaâs most active sector. Total equity deals of $1.6 billion represent 38 percent of its market cap, and bond placements of over $1 billion equal, to 166 percent of current net debt. Both these percentages are the highest among the sectors.
Banks: In 2005, a privatization and two potential IPOs could begin broadening this sector beyond Sberbank.
Other sectors: In smaller, less liquid sectors, expect to see a few privatizations, placements and IPOs in the next three years. Chemicals, however, are much like utilities, in that consolidation should limit equity and bond issuance until after 2007.
James Fenkner is chief equity strategist and head of research at Troika Dialog. This piece first appeared in the October edition of Troika Dialogâs âStrategy Monthlyâ report.
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