In 2005, Russian and Commonwealth of Independent States (CIS) companies raised an impressive £3 bn ($5.27 bn) listing in London, according to the London Stock Exchange (LSE). Comstar, a subsidiary of Russian conglomerate Sistema, raised £606 mn when it joined the LSE in February. And the trend looks set to gather pace this year. ‘The pipeline in 2006 looks like it will be every bit as strong and diversified as last year,’ says Jon Edwards, head of the CIS business development team at the LSE.
The tranche of listings by CIS firms may have bulked up the LSE’s coffers while it was fending off a hostile takeover attempt by Australia’s Macquarie Bank, but they also raise red flags. In short, how good are these companies’ IR, governance and accounting practices?
Kazakhmys, the Kazakh copper miner, catapulted onto the FTSE 100 after a very successful IPO in October 2005. At the time IR magazine went to press, Kazakhmys’ shares were trading at around £9, up from an offer price of £5.40. Questions have been circling about the company’s commitment to UK governance and accounting practices, however.
In its favor, Kazakhmys has elected to incorporate as a UK company and therefore must adhere to the Combined Code. Most other listings from the region opt for global depositary receipts (GDRs), meaning they’re only obliged to meet the governance standards of their own country.
Playing FTSE
Particular attention has been focused on Kazakhmys because its presence in the FTSE 100 means that a number of index tracker funds are obliged to invest. This opens up index investors, many of which are retail holders, to risks associated with investing in a company still new to IR and governance best practice.
Kazakhmys, which is roughly 70 percent owned by three of its directors, has already attracted criticism for some of its corporate governance practices. These include investing its employee pension fund in its own shares, giving an interest-free loan to one of its directors, employing an executive chairman and making a number of unusually high payments to non-execs.
Jinsoo Yang, Kazakhmys’ softly spoken head of IR, has been working hard to explain the company’s strategy to a market that knows little about Kazakhstan, let alone Kazakhmys. He’s enlisted the help of financial PR agency Finsbury, and his efforts seem to be paying off.
F&C questioned the company’s commitment to good corporate governance at its inaugural AGM in December. Now, however, F&C’s director of corporate governance, Richard Singleton, accepts that Kazakhmys is trying hard to adapt to conditions in London. ‘We’re in a continuing discussion with Kazakhmys about areas of potential concern, and it’s quite a productive dialogue,’ he explains.
There are limits to how far the company is willing to conform to the expectations of London’s financial community, however. Yang says some investment banks were keen for an English CFO to be brought in. ‘The problem is that they wouldn’t understand the Kazakh assets,’ he says. ‘If they don’t speak Russian or Kazakh and they don’t have any background or experience in Kazakhstan, how can they understand our operations in Kazakhstan? We are the best people to understand our assets.’
Breaking the rules
There have been suggestions that listing in London is a useful way for CIS companies to bulk up the security of their assets. Home governments are less likely to meddle if a company has a large foreign shareholder base, the logic goes.
But Yang rejects the assumption that listing in London was a way of shielding Kazakhmys’ assets. ‘Maybe that’s true for Russian companies, but we are very different and I’m sorry to see we’re included in the same grouping,’ he comments. ‘The Russian companies are doing GDRs, which have less compliant procedures.’
While speculation about the motives behind certain Russian listings is warranted, Russian companies have to be domestically listed in order to list abroad. ‘There are ways around it, however,’ notes Tom Blackwell, Moscow-based vice president of the PBN Company, a strategic communications and IR firm. Steel producer Evraz Group and Russia’s largest grocery retailer, Pyaterochka, both sidestepped the rules, listing in London through an international subsidiary. These moves left Russia’s market regulator, the Federal Financial Markets Service (FFMS), less than pleased. ‘The actions of Evraz and Pyaterochka are gray schemes; they bypass our legislation, but legally we cannot do anything about this,’ explains an FFMS spokesperson. But, following discussions with the advisers who were responsible for these listings, the FFMS is confident they will be able to avoid such ruses in future.
Predicting the unpredictable
Russian listings in London are not a new phenomenon. Before Sistema came to market at the beginning of last year, there were already four Russian companies listed on the LSE. But 2005 was definitely a watershed year in terms of the number of companies listing and the amount of money raised. In Blackwell’s opinion, there’ll be even more Russian and CIS companies listing in London this year, with one or two particularly big ones in the offing, namely Rosneft and Vneshtorgbank. But realistically, he expects the momentum to then tail off. ‘There’s been so much activity that it’s not sustainable at this level,’ he says.
In future, those looking to list may find a more skeptical London investment community. Novolipetsk Steel, which listed in December, attracted much criticism for the 27 pages of ‘risk factors’ contained in its IPO prospectus, including the news that a director had just resigned after being charged in a criminal case. Investors were naturally left a bit twitchy.
‘It was clear toward the end of 2005 that there was a shift, with more attention focused on risk,’ concludes Blackwell. ‘That’s a trend that’s going to continue now, and it puts more pressure on companies to make their investment case.’
In the shifting world of emerging market listings, it appears that the only certainty is that the market will dictate how well a company’s story shines through.
