Sunday Business, April 8, 2002

By Ben Aris in Moscow.

The Russian stock market, created as an afterthought during the privatisation of the early 1990s, finally came of age last week when the country's leading hi-tech firm announced the first domestic initial public offering (IPO). RosBusinessConsulting (RBC) is Russia's leading media and IT company, controlling a third of the online financial news and information market and offering information technology services. Last Wednesday it registered its listings prospectus with the authorities and will offer shares on Russia's two largest exchanges - the Russian Trading System (RTS) and Moscow Interbank Currency Exchange (MICEX) - later this month. The flotation follows a period of strong growth over the past few years. RBC's profits have risen by a third and revenues have doubled every year since it was first founded in the mid-1990s.

Computer imports were at an all-time high by the end of last year. Internet use is doubling ever year in Moscow and growing by more than 30% a year in the rest of the country. RBC hopes to raise $14m by selling a 16% stake in the company.

"The RBC IPO can't happen soon enough," said Alistair Stobie, managing director of Mint Capital, Russia's only dedicated tech fund. "The market is dominated by oil and telecommunications companies. RBC will be almost unique as a medium-sized company built up for the benefit of shareholders." The company is 100% owned by its Russian founders but, unusually for a company in a country where corporate governance abuses are rampant, there are four independent directors on its 10-man board. "RBC is the first company to list on the RTS with a view to raising money," said Neil Greer, head of sales at Aton Russian investment bank, which is lead-managing the IPO.

"The market was created to trade companies' stock. This is the first time that a stock was created to trade on the market." Russia's stock markets were a by-product of the early 1990s privatisation when workers and management bought state companies using privatisation vouchers. The shares created had to trade somewhere, so the RTS was set up.

The index has performed spectacularly recently, rising more than 80% since September to top 350 late last month, from a low of 38 after the 1998 financial crisis. Some analysts expect it to match its pre-crisis level of 560 this year on the back of strong economic growth. The economy has grown by 6% a year on average since 1998 but, without a working banking sector, companies are desperate for investment cash. Equity finance is one of the few options open. A survey by Russia's Investors Protection Association last November found that eight out of 10 Russian companies are considering using shares to raise money, although only one in 20 actually have. Despite strong growth in share prices, most companies think their valuations are still too low to take the plunge. RBC posted modest earnings of $17m last year. Its offer price gives a price-to-earnings ratio of between 8-10, low by international standards; the management decided to sell shares anyway as fast growth is more important than getting maximum value for the stock.

"It is the right time in their company's life to raise money," Greer said. "The valuations may not be the highest but, at this stage, the company is more interested in continuing its organic growth."

RBC is the second Russian company to use its shares to shop for investment funds this year. In February, Wimm Bill Dann, Russia's leading dairy and juice producer, floated a quarter of its stock on the New York Stock Exchange to raise $207m to fund expansion plans. In March it listed shares on the RTS, which can be converted into US Depository Receipts, a proxy for local shares that can be traded in the US.

"There are a lot more companies waiting in the wings," Stobie said. "Nearly all the companies on the RTS were created out of state-owned assets that were privatised. But there is a ground-swell of small and medium-sized enterprises created in the last 10 years and built up by real entrepreneurs who are now looking for money."

© Copyright Sunday Business Limited 2002.