Expert, No.16 (323), April 22, 2002

For the first time in history, a Russian company has managed to attract assets by selling its shares on the domestic market. The experience of OAO RBC Information Systems will be copied by dozens of other Russian companies.

Until recently, companies could only borrow money in Russia - they could take a credit or issue bonds. The attraction of assets without obligations to return them was possible only in the West and with enormous difficulties. There were only two public offerings - by VimpelCom and Wimm Bill Dann that placed their depositary receipts in the USA.

Internet and Media Holding RBC Information Systems has become the first domestic company to decide to do an IPO on the domestic market. (Formally, it was financial pyramids of the beginning of 90s, such as MMM, that were pioneers in this field. However, what these companies were engaged in cannot be called business - it was fraud and schemes). During the first Initial Public offering - the IPO - which was completed on April 18, RBC sold 16m shares for $13.28m to investors.

Pioneers

The organizer of this floating of RBC's shares was a tandem of Aton capital group (that was responsible for the floating of 65 percent of the shares) and Alfa Bank (that floated 35 percent of the issue). The selling group also included a number of brokerage firms, such as Alor-invest, that provided the distribution of shares among a large range of small investors. Shares were placed simultaneously in the stock section of the Moscow Interbank Currency Exchange (MICEX) and on the RTS stock exchange (the Russian Trading System) in the guaranteed quotation section. According to requirements of the Russian Federal Securities Commission, the trading of shares on the secondary market will start in two weeks.

This IPO was accompanied by a serious boom both on the market and in mass media, which was not surprising: looking at a lot of parameters, this was an unprecedented issue. As we have already stated, this was the first real IPO on the Russian market. It is important to note that it was not an industrial monster with a turnover of billions of dollars and not a giant producing raw materials that was entering the market, but a middle-sized company that, moreover, does not have significant capital assets. Finally, before this IPO, there were no shares of companies engaged in media businesses or information technologies on the domestic market.

If we take a detached view on this event, RBC's breakthrough to the stock market seems a daring step, in the first place because of the price for the placed block of shares. The company's owners and underwriters of the issue estimated RBC at $83m. In the opinion of some experts, this price is evidently overrated in regards to the company's revenues: the company's capitalization is almost 5-fold as much as its revenues received in 2001 and more than 13-fold as much as its net profit for the same period. Another doubt that arises is whether the company will be able to maintain the current high rates of growth in the future. Meanwhile, the management and underwriters have their own opinion concerning the cost of the company and its outlooks.

Rapid growth costs much

According to RBC General Director Yury Rovensky, the estimations of a rise in the company's revenues and the evaluation of its assets, provided by underwriters, are very pragmatic. "Our potential is in the profits we receive and in the stable dynamics of these profits, which we demonstrated over the past several years," he said. Indeed, for the past three years RBC increased its turnover by at least two-fold. However, is it correct to expect these high growth rates to last in the future? It was this rise together with invariability of profit norms that were the ground for estimating the cost of the issuer, conducted by Aton by the method of discounting payment flows.

According to forecasts of investment bankers, the share of net profits in the issuer's revenues will not drop below 33 percent at least until 2007 (in 2001 this share was 37 percent). As a result, even according to a conservative scenario the company's cost was estimated at about $69-93m. This scenario stipulates for a 20-percent discount rate (Aton is using such discount rate for estimating shares of the so-called second-tier companies). The average value of the above-mentioned range - $82m - was taken as a base price for estimating the final cost of the issue. In addition, Aton estimated the holding in comparison with western media and IT companies. The results of this evaluation of RBC were even higher - $125m.

However, investment bankers noted this method of evaluating the company's cost was not quite correct, as RBC surpassed its western counterparts in growth dynamics and cost effectiveness because it was still at the early stage of its development. Another important factor, according to Aton President Yevgeny Yuriev, is that RBC is a unique company, which combines media business with IT services, thus it was not easy to find its analogue for a comparative analysis.

In any case, investors were not confused by the price of $0.83 per share. According to Mr. Rovensky, indicative applications demonstrated that demand was five-fold more than the offer. Applications for purchasing shares were coming from a wide circle of investors, including foreign and Russian market participants. The majority of offers were submitted by foreign institutional investors and more than a third of the offers were made by foreigners. The remaining applications were made by private investors.

Speculating on the deficit

The active participation of investors in this campaign, which is exotic for the Russian domestic market, testifies that the company's management and underwriters of the issue have chosen the right place, time and price. We should not underestimate opportunities offered by the Russian capital market: there are assets on the market, but to attract them, one has to make a good offer, Mr. Rovensky was quoted as saying. Obviously, RBC as a company and as a brand is better known in this country than in the West, where outlooks for IT companies seem dim after the Internet soap bubble popped there. On the contrary, the macroeconomic and market situation in Russia is favorable for active issues in the hi-tech sector.

Underwriters expected a high demand for this issue from the very beginning. That is why they advised the issuer to increase the initially planned volume of shares to be floated from 12m to 16m. According to Aton's Managing Director Albert Gavrikov, this was a step to meet the interest of investors, who are interested in the largest volume of the issue possible. Eventually the number of RBC shares on the market may be increased from the current 16 percent to 25 percent. To maintain the market's liquidity, the company's board of directors reserved the right to float an additional 2 percent of shares after the IPO. In addition, holders of the company's bonds worth $5m, which were issued by RBC at the end of 2001, have the right to convert their bonds to the holding's shares before September 30, 2002.

Prior to the IPO, Mr. Rovensky announced he was positive of the success of the IPO. The floating will be completed with a bang, he was quoted as saying. A lot of market participants shared his optimism. At the same time, some professional market participants were skeptical about the liquidity of RBC shares on the secondary market. For instance, head of the analytic department of the Prospekt investment company Alexander Korchagin doubts that these securities will be liquid enough to present interest to stock players. Prices for the company's shares may grow after they are floated on the secondary market, however, this rise will be caused by a significant surplus of demand over the offer due to the limited volume of traded shares, the analyst said. Meanwhile, it seems that the major shareholders are not going to increase the number of shares traded on the market. According to Mr. Rovensky, they are awaiting a rise in prices for RBC shares and are not hurrying to share future gains with the market.

Financing ambitions

The issuers did this IPO to obtain the image of a public company, to manage capitalization and for many other reasons. However, the main goal was to receive "interest-free" assets. What is the purpose of receiving so much money for a company, whose revenues are rocketing? Mr. Rovensky says this money is necessary for a fast and quality growth. In his opinion, this growth includes the enlargement of businesses in traditional fields of the company (such as the IT sector) and expansion onto new markets, in particular, the television and press markets. The holding is interested only in successful projects, which can provide a synergy effect to the current endeavors of RBC.

According to Mr. Rovensky, 40 percent, or about $5.3m, of revenues from the IPO will be spent on mergers of other media businesses. It is obvious that a sound media business (RBC would not be interested in any others) costs more than assets attracted by the company. However, including about $10m accumulated at the holding's deposits (undistributed profits plus revenues from the sale of bonds), the company can think of purchasing a well-established media company. Mr. Rovensky promised that the results of the expansion strategy could already be observed this year.

About RBC

RBC was established in 1992 as a financial information agency. At present, this is a holding uniting media business and IT solutions. All businesses of the company are concentrated in four subsidiaries, which are 100-percent owned by the parent company. The main shareholders of RBC Information Systems are its founders - President German Kaplun and Vice Presidents Alexander Morgulchik and Dmitry Belik. Each of them owns a 26.23-percent stake in the holding. The number of RBC's employees is 482 people, mostly programmers and journalists.

Armen Munayan