Moscow Exchange Renewal Clouds IPO Appeal to Prosperity

The modernization of the Moscow Exchange makes forecasting its revenue harder and may deter foreign investors from buying shares in the bourse, according to Prosperity Capital Management.

The exchange, Russia’s main equity and fixed-income market is being marketed to investors in the U.S. and Europe and its stock will debut in Moscow Feb. 15, according to a statement last week. The bourse, created out of a merger between competing exchanges in 2011, is seeking to raise at least 15 billion rubles ($499 million) in the initial public offering.

“This IPO is more complicated, it’s not so straightforward as an IPO by some retail chain or a raw materials producer as it relates to regulations and functionality of the financial markets,” Mattias Westman, who helps oversee about $4 billion in Russian assets as chief executive officer of Prosperity Capital in London, said by phone yesterday. “The Russian market infrastructure is developing very intensively and that might make it more difficult to estimate future revenue of the exchange.”

The Moscow Exchange IPO will be covered, Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said in Moscow today. Bank Rossii is the bourse’s largest shareholder, holding 22 percent, according to the exchange’s website as of Jan. 16.

“The placement has certain specifics, this is a purely local placement,” Ulyukayev said. “Many investors are just not ready, they aren’t comfortable, this will be their first placement of such a sort. But it will help the others planning to list on this platform.”

Chinese Prospects

The Kremlin-backed Russian Direct Investment Fund is seeking to buy as much as $100 million of stock in the exchange’s IPO, according to a person with knowledge of the private-equity fund’s plan, who asked not to be identified because the information isn’t public.

RDIF are also trying to bring Chengdong Investment Corp., a unit of Chinese sovereign wealth fund CIC International Co., into the IPO to buy 25 percent of the shares being offered, three other people said. They asked not to be identified because the information isn’t public.

The exchange set a maximum price of 63 rubles a share and won’t accept offers of less than 55 rubles, according to the Feb. 4 statement. It plans to use the proceeds to boost the capital of its clearing subsidiary, the National Clearing Center, and for information technology upgrades, according to the statement.

Russia, the world’s largest energy exporter, is seeking to reform the exchange’s trading systems and open up access to its local market to lure more foreign capital to the country and bolster the lowest stock valuations among 21 emerging markets tracked by Bloomberg.

Opening Up

As of Feb. 7, foreign investors can buy and sell government ruble-denominated debt known as OFZs via Euroclear Bank SA, which operates the world’s biggest bond settlement system. The platform will be opened to stocks from July 2014, Elena Gusalova, the National Settlement Depository’s director of research and development, said in November.

The bourse will move to settling trades over two days, from the current immediate settlement, by the end of 2013, Sergey Sinkevich, the exchange’s head of primary markets, said last year. Russia also merged its two competing depositories Nov. 6 to bring settlement procedures in line with international norms.

The IPO will attract local investors, who “understand their market better,” said Westman, adding that Prosperity is still analyzing the company and mulling whether to invest in the IPO.

Undermine Revenue

The introduction of a central depository may over time undermine one of the exchange’s sources of revenue as it diminishes the need for repurchase transactions since investors no longer have to keep their money with the bourse, he said.

Prosperity’s Russia Domestic Fund, which invests in securities issued by companies active in the local economies of Russia and former Soviet nations, has returned 7.6 percent in 2013 and outperformed 91 percent of peers, data compiled by Bloomberg show.

Quinn Martin, a Frontier public relations executive representing the bourse, declined to comment on how the roadshow is faring or on expectations about demand when contacted by phone in Moscow yesterday.

Companies on the Micex index have an average valuation of 5.7 times estimated earnings, compared with a multiple of 15.6 for India’s BSE Sensex Index, 11.3 for Brazil’s Bovespa index and 10.5 for China’s Shanghai Composite Index, data compiled by Bloomberg show. Russia-domiciled companies have raised $1.91 billion in IPOs over the past 12 months, separate date show.

‘Unique Product’

“The Moscow Exchange IPO is a unique product and it makes sense for long-term investors who can wait for further reform of the market which will lead to more liquidity and business for the exchange,” Ilya Kravets, director of investment research at Daniloff Capital LLC in New York, where he helps manage $100 million of assets including Russian equities, said by phone yesterday. “In the meantime, there are risks, particularly risks associated with the structure of its revenue.”

BlackRock Inc., the world’s biggest asset manager, had bought shares in the Moscow Exchange from RDIF in September, the fund said in a statement on Sept. 28. State-controlled lender OAO Sberbank owns 9.6 percent of the bourse, and Vnesheconombank, Russia’s development bank, holds 8 percent, according to the exchange’s website.

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