Evraz, Polymetal Join FTSE 100 to Escape Russia Country Risk
Evraz Plc and Polymetal International Plc will be the first Russian companies to join the U.K. benchmark FTSE 100 Index, escaping rising country risks as Prime Minister Vladimir Putin attempts to reclaim the Kremlin.
Polymetal, Evraz and CRH Plc (CRH) are being added to the benchmark to replace Inmarsat Plc (ISAT), Investec Plc (INVP) and Lonmin Plc (LMI), the index, a joint venture of the London Stock Exchange and the Financial Times, said in a statement today. Polymetal and Evraz became eligible for inclusion after moving their main listing to London.
Evraz, part-owned by Russian billionaire and Chelsea football club owner Roman Abramovich, becomes the first steelmaker in the FTSE 100. Polymetal, a gold and silver producer, dropped out of the MSCI Russia Index in favor of the FTSE 100’s wider range of investors, including U.K. pension funds.
“The Russian miners are sending a signal to investors: ‘Come on, treat me like a serious international company,’” said Roland Nash, chief investment strategist at Moscow-based hedge fund Verno Capital, which manages $175 million in Russia. “They escape the bad bit of emerging markets -- weak institutions -- while keeping the good bit, which is growth.”
Putin’s United Russia on Dec. 4 had its biggest election setback since it was created a decade ago, losing its super- majority in the State Duma. About 1,000 people have been detained in Russia protesting the election results, which opposition groups and observers said was marred by violations. Putin is seeking to return as president in March.
Polymetal and Evraz are seeking to escape volatility associated with Russia and emerging markets, said Nikolay Sosnovskiy, a metals analyst at VTB Capital in Moscow.
Russian companies have traditionally traded at a 30 percent to 40 percent discount to global peers because of investor skepticism about corporate governance, Nash said. Admittance to the FTSE 100 will hold them to stricter standards, he said.
Evraz’s price-to-earnings ratio is 7.98, compared with 12.67 for ArcelorMittal, the world’s largest steelmaker, according to data compiled by Bloomberg. Polymetal, based in St. Petersburg, trades at more than 20 times earnings versus 34.48 for Randgold Resources Ltd., a member of FTSE 100.
“With a primary listing in London, the companies get a more diversified investor base, more liquidity and less volatility, which results in a lower cost of capital for their expansion,” Nash said.
Shares as ‘Currency’
London-traded shares are “more attractive for any potential M&A target than global depositary receipts have been” because they are more liquid, Evraz Chief Financial Officer Giacomo Baizini said by e-mail.
“Our promotion to the FTSE 100 reflects the quality of our business and high standards of corporate governance at our company,” Polymetal Chief Executive Officer Vitaly Nesis said in a statement. The company has several acquisition targets and may use the London shares as “currency,” he said in an Oct. 13 interview.
The primary London listing will make equity-based acquisitions easier, said Rob Edwards, chief metals analyst at Renaissance Capital Ltd. Polymetal’s Russian shares and depositary receipts suffered from “relative illiquidity” and deals with them “took almost years to close,” Edwards said.
The change echoes the 1999 moves by South African Breweries Ltd. and Anglo American Plc (AAL) of their headquarters and primary listings to London from Johannesburg to attract global investors and aid international expansion after the economy slowed in post-apartheid South Africa.
“Political risks are clearly rising and have become an important trend to watch,” Charles Seville, a credit analyst at Fitch Ratings, said Dec. 5. While United Russia’s support eroded in the parliamentary election, the outcome of the presidential election is “in little doubt.”
Putin stepped aside as president in 2008 in favor of Dmitry Medvedev, after serving the maximum two consecutive four-year terms. The term will be lengthened to six years starting from 2012. Putin has said he may appoint Medvedev as his prime minister after the March election.
Putin and Medvedev’s possible job-swap “could cause political protests and unrest,” Evraz said in an October prospectus for a share swap it used in moving its listing. Any suspension of economic reforms or lack of consensus between the president, government and powerful economic groups could cause Russia’s investment climate to deteriorate, Evraz said.
Evraz was previously registered in Luxembourg and sold depositary receipts in London in 2005. The company has spent $7.8 billion to diversify beyond Russia since 2006, buying assets in the U.S., Canada, South Africa and China, according to UralSib Financial Corp. That was the year Abramovich became the steelmaker’s largest individual shareholder.
Polyus Gold International Ltd., Russia’s largest gold miner, plans to change its domicile to London via a share swap and then seek inclusion in the FTSE 100, the company said last month.
OAO Uralkali, Russia’s largest fertilizer producer by market value, is also considering switching its main listing from Moscow to London.
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