Russia’s Yandex Offered at Double Google Value
(Corrects date of report in 17th paragraph in story published May 23.)
Yandex NV, the owner of Russia’s most popular Internet search engine, is offering shares at about twice the price of Google Inc. relative to earnings.
The Moscow-based company, which has almost triple Google’s market share in Russia, plans to sell shares at a price equivalent to at least 23 times next year’s earnings, said two people involved in the sale who declined to be identified until the deal is announced. Google trades at 13 times expected 2012 earnings.
Underwriters stopped taking investor orders for Yandex shares on May 20, rather than this week as planned, because of surging demand for Internet IPOs, said two other people with knowledge of the matter. The initial public offering in the U.S. may raise more than $1.26 billion, making it the world’s biggest technology IPO this year, after two people with knowledge of the transaction said the shares may be priced above the company’s original range.
“It’s a bit scary to pay such multiples, but if that’s how the market values it, that’s how much it’s worth,” said Dmitri Kryukov, founder of Moscow-based Verno Capital, which has about $150 million under management and is seeking to buy Yandex shares. “This is a good, fast-growing company.”
Yandex is likely to set a price at or above $24 a share, said the people who declined to be identified before an official announcement. The Moscow-based company was selling 52.2 million shares for $20 to $22 apiece. It will list on the Nasdaq Stock Market under the symbol YNDX. At $24 a share, Yandex would be valued at $7.71 billion.
The sale comes less than a week after Mountain View, California-based LinkedIn Corp. raised $352.8 million, pricing its IPO at top end of the range proposed to investors.
Yandex’s profit jumped 62 percent to 820 million rubles ($29 million) in the first quarter from a year earlier, as sales climbed 65 percent to 3.89 billion rubles, according to the company’s prospectus.
Yandex, co-founded by Chief Executive Officer Arkady Volozh and registered in The Hague, makes most of its revenue from advertising, the company said in the prospectus. Online advertising in Russia climbed 51 percent from 2008 through 2010, when it reached 26.65 billion rubles, according to the Moscow- based Association of Communication Agencies. Spending on print ads plunged 41 percent in the same period, while the radio and television segments fell 21 percent and 6 percent, respectively.
“It’s still not clear how social networking sites can monetize their business, but Yandex has a straightforward business model,” said Anna Lepetukhina, an analyst at Troika Dialog in Moscow. “It’s not a start-up.”
About 70 percent of the stock in the IPO comes from existing investors, including Baring Vostok Capital Partners and Tiger Global Management LLC, according to the company’s filing. Yandex’s spokesman Ochir Mandzhikov declined to comment today because Securities and Exchange Commission rules require a quiet period before an IPO.
Proceeds from the sale will be invested in technology, infrastructure and possibly acquisitions, the company said in the prospectus. Morgan Stanley (MS), Deutsche Bank AG (DBK) and Goldman Sachs Group Inc. (GS) were hired to manage the sale.
Five Russian companies including Euroset Holding NV, a mobile-phone retailer, and OAO Russian Helicopters pulled their offerings in London and Moscow this year because of weak demand.
Russian stocks are “cheap,” trading at a discount to other emerging-market equities relative to earnings because investors view Russia as a riskier market, said Hugo Bain, senior investment manager at London-based Pictet Asset Management, which has about $1.5 billion invested in Russia. Yandex stands out because it “seems to be a very well established company” in a growth industry, he said.
Companies in the Micex Index (INDEXCF) of Russian stocks trade at 6.7 times estimated earnings, compared with 10.7 for the MSCI Emerging Markets Index of shares from 21 developing countries, according to data compiled by Bloomberg.
The Russian search engine started its website in 1997 when it only took 4 gigabytes to index the entire Russian Internet. It now takes about 6 gigabytes to download a high-definition movie.
About 47 million Russians, or 33 percent of the country’s 143 million people, used the Internet in March, the biggest number in Europe after Germany, according to research firm ComScore Inc. The Internet audience has risen 13 percent in the past year, with 60 percent of teenagers and adults in cities with populations greater than 100,000 using the Internet, according to a March poll conducted by researcher TNS Russia.
Russia’s Internet industry is experiencing “rapid growth” and may account for 3.7 percent of gross domestic product by 2015, more than double the industry’s contribution in 2009, the Boston Consulting Group said in a report released May 19. President Dmitry Medvedev, who posts to online blogs and visited the San Francisco offices of Twitter Inc. during a trip to California last June, has made “modernization” a priority of his administration. About half of state budget revenue comes from energy sales.
“Everyone wants to buy future growth,” says Victor Klimovich, an analyst at VTB Capital in Moscow. The Internet industry is expanding, he said.
Mail.ru Group Ltd. (MAIL), an investor in Facebook Inc. and the operator of Russian social-networking sites and games, raised $912 million in an IPO in London in November. Shares were sold at the top end of the company’s $23.70 to $27.70 range and were 20 times oversubscribed. The stock fell 6.3 percent to $35.05 in London today, paring gains from the offer price to 27 percent.
Russia’s Micex Index dropped 1.9 percent to 1,573.14 by the 6:45 p.m. close in Moscow, its lowest level since Nov. 30, after oil fell and concern Europe’s debt crisis will hurt the economic recovery curbed investor appetite for riskier assets.
Yandex “is a very mature, extremely highly regarded tech company,” said John T. Connor, who helps oversee $50 million as chief investment officer of Third Millennium Advisors in New York. “After the LinkedIn IPO, I think people felt bullish about the space.”
Investors in LinkedIn, the first IPO of a major U.S. social-media site, are left with a 107 percent gain after the shares began trading on May 19. Google rose 18 percent in its 2004 IPO. There’s mounting concern that some technology shares may be overvalued as investors shake off their apprehension from the 2007-2009 collapse of the credit markets, former U.S. Treasury Secretary Lawrence Summers said at a conference May 20 in Shanghai.
Yandex ranks sixth in the world among global search engines by number of requests, and handles 65 percent of Russian searches, according to UralSib Financial Corp., a Moscow-based investment bank. That compares with a 22 percent share of the Russian market for Mountain View, California-based Google and 7 percent for Mail.ru., UralSib said.
“If the sale goes well it will send a positive signal to the whole market,” Verno Capital’s Kryukov said.
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