Lenta’s London IPO Success Tied to Pricing Below Magnit

Lenta Ltd., the Russian hypermarket chain in the process of listing its shares in London, will have to offer a discount to OAO Magnit to lure investors, according to Union Investment and Swedbank Robur.

The company reported revenue of 62 billion rubles ($1.7 billion) for the first half of 2013, about one-fourth that of Magnit, Russia’s biggest retailer and the second-most expensive stock on the Micex Index based on forward price-to-earnings valuations. Lenta, controlled by U.S. leveraged buyout firm TPG Capital, said today it had an 11.4 percent margin on earnings before interest, taxes, depreciation and amortization last year, topping the 11.2 percent Ebitda margin of Russia’s retail industry leader Magnit.

The plans for the initial public offering come as the Micex posted its worst start to a year since 2008 while the ruble slumped to a record low as data showed slowing economic growth and following a selloff in emerging-market currencies. The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. tumbled 12 percent in January. Futures on the RTS Index added 1.3 percent to 131,530 in New York hours.

“If they price at Magnit’s levels, there won’t be anyone willing to buy the shares,” Ekaterina Iliouchenko, a money manager at Union Investment in Frankfurt, who oversees about $350 million in Eastern European assets, said by phone on Jan. 31. “It’ll be difficult to sell right now. Any kind of IPO at the moment will be difficult until the currencies stabilize.”

Biggest Market

Existing owners including TPG, the European Bank for Reconstruction and Development and Russia’s VTB Capital will be offering stock, according to today’s statement. The IPO seeks to raise about $1 billion, two people familiar with the matter said last week. The company plans to list global depositary receipts on OAO Moscow Exchange after admission to London trading, according to the filing.

Lenta’s sales surged 31 percent last year to 144 billion rubles, outstripping a 3.9 percent advance in total Russian retail sales. JPMorgan Chase & Co., Credit Suisse Group AG, VTB Capital, Deutsche Bank AG, UBS AG and TPG Capital BD are managing the sale, Lenta said today.

Yana Mogileva, a Lenta spokeswoman in St. Petersburg, declined to comment on the company’s plans. Charlie Harrison, a TPG spokesman in London, also declined to comment when contacted by phone.

Russia, the world’s largest country by area, will be Europe’s biggest retail market by 2018, researcher Euromonitor estimates. Retail sales grew 3.8 percent in December from a year earlier, slowing for the first time in three months and falling short of the 4 percent median estimate of 19 economists surveyed by Bloomberg. Wages adjusted for inflation increased 1.9 percent in December, the slowest since February 2011, the Federal Statistics Service said on Jan. 27.

‘Lower Multiples’

“Market conditions for a Russian retail IPO have definitely deteriorated since last year,” Elena Loven, who helps manage more than 1 billion euros ($1.3 billion) in Russian stocks at Stockholm-based Swedbank Robur, said by e-mail on Jan. 31. “If Lenta owners are prepared to sell at lower multiples, some investors may take a look. The answer is in the price.”

Global depositary receipts of Magnit, offered $8.50 apiece in 2008, closed at $52.75 in London on Jan. 31. The GDRs trade at 19 times estimated earnings, according to data compiled by Bloomberg. OAO Dixy Group trades at 11 times estimated earnings, compared with 16 times for O’Key Group SA and 15 times for X5 Retail Group NV.

Magnit, which reported slower sales growth in December, posted a record profit margin in the fourth quarter on Jan. 27. Still, the stock plunged 20 percent last month in London, prompting owner Sergey Galitskiy to call the market “crazy” during an earnings call.

‘Very Aggressive’

“Investors are now very aggressive and punish retailers very hard each time revenue misses estimates,” Ksenia Arutyunova, an analyst at Rye, Man & Gor Securities, said by phone from Moscow Jan. 31. “There will be a lot of pressure on Lenta; first, they have to show steady increase in sales; next, they have to have sustainable Ebitda margin of at least 11 percent.”

Lenta joins German retailer Metro AG, which confirmed Jan. 20 that it plans to proceed with a partial IPO of the Cash & Carry unit in the first half of this year. Detsky Mir, Russia’s largest retailer of children’s goods, selected Credit Suisse Group AG and JPMorgan Chase & Co. to help it sell shares later this year, people familiar with the matter have said.

Network Plans

Founded in 1993, Lenta operates 77 hypermarkets in 45 cities across Russia and 10 supermarkets in the Moscow region, making it Russia’s second-largest hypermarket chain, according to the company’s website. It plans to double its store network in three years.

The Micex Index gained 0.3 percent to 1,458.03 by 11:23 a.m. in Moscow today. The Bloomberg Russia-US gauge slumped 0.5 percent to 89.71 on Jan. 31, while the Micex retreated 3.3 percent to 1,454.45 on the month. The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund that holds Russian shares, slipped 0.6 percent to $25.26 on Jan. 31, extending its monthly tumble to 13 percent. The RTS Volatility Index, which measures expected swings in the index futures, gained 2.7 percent to 25.87 today.

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