Brexit may not be catastrophic for the London Stock Exchange, despite naysayers' dire prophecies.
En+ Group, an integrated hydro power and aluminum producer owned by the Russian billionaire Oleg Deripaska, is mulling an initial public offering in London this summer to raise as much as $2 billion. This would be Russia's biggest public share offering for almost five years and the first Russian IPO in London since 2014.
The En+ bold move is remarkable in many ways. Before the Ukrainian crisis, London Stock Exchange was the key destination for major Russian companies going public. Russians raised almost $70 billion in London since 2005 in 46 flotations, according to Dealogic. Questionable post-Soviet business practices were no barrier for the UK regulators. Russian assets enjoyed a great deal of vogue among portfolio managers then. Almost always undervalued compared to other emerging market firms, Russian shares promised tidy returns and paid back generously.
It all turned sour in 2014 when the war in Ukraine sparked the harshest confrontation between Moscow and the West since the end of the Cold War.
Shortly after the first Western sanctions against Russia were imposed, Moscow recommended that the Russian companies delist their shares from overseas stock exchanges.
In the fear of further sanctions, Russia's country risk premium soared, and Russian assets turned all but "geopolitically radioactive," suffering a major sell-off. In 2014, when oil prices plummeted and Russia's foreign-currency credit rating was cut to junk, Russian shares were traded at a fraction of their pre-crisis price. Volumes went down dramatically and liquidity dried out. It no longer paid for Russians to keep their listings in London and they started to leave.
While the only two larger Russian companies, which are fully listed in London, Polymetal and Evraz (both in the FTSE 250 index), back in 2014 there were 66 companies with secondary listings of depositary receipts.
Now the number is down to 44. Among those who left are gold miners Polyus Gold and Nordgold, potash producer Uralkali and Eurasia Drilling oil company.
It adds to London's string of woes.
LSE's Alternative Investment Market (AIM), the sub-market for smaller companies that launched back in 1995, has been struggling for more than 5 years. The slumping commodities prices have created difficulties for smaller natural resource companies. Delistings were up 18 percent — with the total of 105 companies delisted in a year. IPOs are at the lowest level since 2010.
Then, last year, along came Brexit. LSE was hit badly: Just under $7 billion was raised in IPOs in London (down more than $10 billion from 2015). London's share of global IPO volume is running at its lowest since 2012.
According to EY, "London's Main Market and AIM slipped from fifth position in 2015 to seventh in 2016 among the world's most active exchanges by capital raised, and from eighth to ninth position in terms of deal volumes."
Against that background, Deripaska's audacity may pay off. His choice of time and the market may prove a very shrewd move.
London still has global investors and deep pools of capital.
It still has its very competitive financial infrastructure and the rule of law.
En+ IPO may be the biggest by expected proceeds in London since 2015, and about one-quarter of what was raised at LSE last year. With Citi, Credit Suisse, and J.P.Morgan rumored to be at the helm of the IPO, it looks like EN+ is aiming at a full listing option with the prospects of making it to FTSE100.
Deripaska will surely be man of the hour. His IPO is in many ways a lifeline for the city. He might even get some political endorsements too, as the UK is now desperate to show Brussels that London is still the world's financial center — despite the EU's efforts to play hardball on Brexit.
As other emerging markets sink and the sanctions regime continues, investors' appetite for Russian risk is still considerable. As fears of new sanctions on private Russian companies subside, their decent returns look increasingly attractive.
Across the world, power generation and metals companies are traded at about eight to twelve times their earnings before taxes, interest and depreciation (EBITDA). Deripaska's group posted EBITDA of over $2.3 billion for 2016. So, if rumored valuation of about $8 billion to 10 billion implies just about 4 times its EBITDA and about 50 percent discount compared to peers, an upside which many would find decent enough to offset all political risks.
The company is said to bet on rising aluminum prices, as China is expected to cut production due to environment concerns (almost all aluminium smelting in China is coal-powered). En+ runs its own, the world largest, renewables generation capacity with hydro power plants, achieving 81 percent profit margin.
If successful, the En+ IPO may mark a turnaround for the London Stock Exchange — and a renewed western vocation for Russia's capital-hungry companies, which hitherto looked towards Asian financial centers.
Commentary by Ariel Cohen, director of the Center for Energy, Natural Resources and Geopolitics at the Institute for the Analysis of Global Security. He is also a senior fellow at the Atlantic Council. Follow him on Twitter @Dr_Ariel_Cohen.
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