The Liverpool Football Club of England, the holder of a glorious name and a large number of sport records, has been deprived of success in the international arena for as long as 11 years and unlucky to win a home championship for more than a quarter of a century. But regardless of its tournament standing, Liverpool F. C. has gained fame with its anthem, “You'll never walk alone”. This song, written by American composers Richard Rodgers and Oscar Hammerstein II in 1945 for the “Carousel” musical, had originally nothing to do with football, but now it is strongly associated with the Merseysiders. Despite the hardships, the favorite team will not be left without support - this is the meaning of this song in the interpretation of Liverpool fans.
It is not known how many football fans are among the new shareholders of ALROSA, who bought the company’s equities during its recent SPO, but the organizers went into attack on their wallets like Ian Rush, the legendary Liverpool striker used to penetrate to the rivals’ gate – always taking a shortcut. The transaction took place at an accelerated pace - within two days; and, despite the Brexit and confrontation over sanctions, it attracted exactly that amount of interest from investors, which was enough to oversubscribe the bid book almost two-fold allowing a minimum discount (secondary public offerings are not made without discounts). And, like England’s Liverpool, ALROSA was not left without support - a weak interest from investors in the United States due to the sanctions and accelerated procedure of the transaction was offset by solid bids from Middle Eastern and Asian funds. This gave an occasion to Igor Shuvalov, First Deputy Prime Minister to picture forth the achievements of the government's policy in “substituting investors,” although to talk about trends in this field it is necessary to do the same with regard to several more state-owned assets in the course of privatization.
However, it was not always that ALROSA had a red-carpet treatment on the stock exchange. In 2013, the organizers of the company’s IPO ran into difficulties while closing the bid book (at that time, the diamond miner was floating 16% of its stock). According to many participants, the price range of 35-38 rubles was rather “aggressive.” This price scared off some investors, who until recently tried to achieve a more comfortable environment. In order to persuade them, Igor Shuvalov personally joined ALROSA’s road show, as he was supervising the company at that time. As a result, the organizers managed to close the bid book at a minimum price of 35 rubles per share and only with the help of the Russian Direct Investment Fund (RDIF), which on its own behalf and on behalf of its co-investors provided the right number of bids to purchase ALROSA’s shares.
In the run up to the diamond miner’s SPO in 2016, the situation was fundamentally different - ALROSA doubled its capitalization on the Moscow Exchange since the initial public offering, thus firmly strengthening its image of a company unique by exposure on its market in the minds of investors. Nevertheless, the case of “ALROSA privatization” had several unknowns from the very start. To begin with, the authorities were hesitant to decide if they should stake on the company’s sale of shares or on its higher dividends? If ALROSA was to be sold, then will it be 18.9% (the option offered by the Ministry of Economic Development) or 10.9% (which was a more cautious proposal from the Finance Ministry)? Also, were there some alternatives to the Moscow Exchange as a placement floor? Was it possible to have a strategic investor or will privatization take place as a public sale of shares to a wide range of investors?
A positive decision on the sale was made in spite of the position voiced in the end of February by Yury Trutnev, Deputy Prime Minister in charge of the company, who compared the privatization of ALROSA with “selling a cash cow.” According to Trutnev, an alternative to the privatization of the state-owned shares in ALROSA could be higher dividend payments: in this case, the state could have the same amount of money “within a couple of years,” while remaining the owner of the company’s shares. The numbers, however, are not comparable: the state earned over 52 billion rubles from the sale of a 10.9% stake in ALROSA within a few days, whereas it could take 8 years to have the same amount through dividends. Here it should be noted that ALROSA increased dividend payments for 2015 to 50% of its net profit under IFRS, and this was a record level for ALROSA.
As for the size of the miner’s stake to be floated, the decision was not equally radical. In early May, the president of the Russian Federation issued a decree saying that the federal share in the diamond mining company could be reduced to 33% from the current 43.9%. However, the representatives of the Ministry of Economic Development said that after the sale of the 10.9% shareholding a new round of privatization was not excluded, in which a further 8% stake would be floated in 2017-2018 and thus the share of the Russian Federation will drop to a blocking stake.
The possibility of listing ALROSA on the Stock Exchange of Hong Kong, which is trading in the shares of Rusal and IRC, the only issuers there from Russia, was discussed during the visit of Yury Trutnev to China in May. However, the government, to paraphrase Alexey Moiseev, Deputy Minister of Finance, has decided to develop the Russian financial infrastructure in the first place.
Emergence of a Russian strategic investor in the charter capital of ALROSA – the role sought by Suleiman Kerimov, Vladimir Potanin and Viktor Vekselberg in different times - was quite doubtful due to the fact that the 11-percent stake would not allow them to take part in the company’s management the way they needed. Selling a more substantial block of shares to a foreign “strategist” seemed an altogether surreal scenario, as such a shareholder could block any decisions of the Russian Federation and Yakutia. Although in this case the sale of shares could be carried out at a premium, but the authorities did not want a premium at such a price. "We pursued the strategy of selling to an as wide as possible market range attracting a large number of small and high-quality investors, and this task was completed,” Igor Kulichik, Vice President and Chief Financial Officer of ALROSA said.
The placement price of 10.9% of ALROSA shares was 65 rubles (allowing about a 4% discount to the closing price on July 6, when the bid book was opened). The decision on price was taken on the basis of the weighted average of ALROSA quotations for 6 months, and the discount was unprecedented for Russian companies floating their stock, commented Boris Kvasov, Equity Capital Markets Director of VTB Capital (the organizer of the transaction, together with Sberbank CIB).
Demand exceeded supply about two times as much. In the final structure of demand, the European and Russian investors accounted for 35%, as Kvasov specified. One fourth of demand came from Asian investors and the Middle East sovereign wealth funds – it is worth noting that due to the significant weight of their financial resources, this category of buyers could get a better allocation than others. There are no precise data on the distribution of shares between buyers (as well on their names) and such data will never be offered, but the Russian Direct Investment Fund announced that together with investors from the Middle East, Asia and Europe they bought about half the volume of ALROSA’s placement.
This time, the US investors, who played an important role in the IPO of ALROSA in 2013, accounted only for 5% of the total demand. “If in the course of the company’s IPO American investors could subscribe the bid book completely and eventually Lazard, Oppenheimer and Capital Group received a third of the book, now the situation changed, and the center of gravity had gone to Europe and the Middle East being topped off by Russia,” Kulichik said.
This is explained not only by sanctions, which make the purchase of any Russian assets risky. The expedited procedure of the transaction did not allow many US funds to make a decision in time, explained Kulichik. “Many American funds, with whom we talked, said they would be happy to join the deal, but only in case it was carried out not in the mode of accelerated book building, but in the mode of standard preparations, including the memorandum and prospectus,” Vice President of ALROSA said. “There was no pressure on our [American] shareholders, they admitted that they would have taken part in the transaction, if they wanted to. To some extent, they did not have time to go through all the procedures and partly they deemed it inexpedient to participate right now.”
This format of the transaction (accelerated book building) was due, firstly, to the fact that the company was already well known to investors and had a guaranteed demand for its equities; and secondly, due to the desire to avoid risks. “We kept the book open on Wednesday evening until Friday evening,” said Kvasov of VTB Capital. “There was no memorandum or prospectus: the company is well known to the market, all analysts publish reports on it, it is completely transparent. Its management maintains an ongoing dialogue with the investment community. From a preliminary dialogue with investors, we understood that the interest is there, but we did not want to expose the bid book to higher market risks. If the book is open for a week, anything may happen in our unpredictable times, and the transaction would be in jeopardy.”
The fact that some investors did not have time to join the deal has positive effects as well. Those who took part in ALROSA’s placement, will be able to earn some money and the company’s stock will receive support on the background of the resulting demand, Anna Vasilenko, Managing Director of the Moscow Exchange explained. Trading in ALROSA’s stock reached about 550 million rubles per day in the last 3 months, excluding July. In recent days, it exceeded 1 billion rubles, and the price is rising. On July 13, 2016 ALROSA shares closed at 71.2 rubles, which is 9.5% higher than the SPO sales price. Due to a higher free float of ALROSA, the company’s weight in the MSCI index will go up to 2% from the current 1.4%, which will result in an influx of about $ 70 million from index funds (according to VTB Capital).
Despite the lower state-owned stake in ALROSA, the diamond miner will remain strategically important for the Russian government and the probability of state support to the company remains - this statement was made by Moody's, an international rating agency a few days ago. In other words, ALROSA ‘will never walk alone.’ Any support is to be justified - even the most selfless fans of the Liverpool F.C. team require from it compliance with its glorious past from time to time. The management of ALROSA, not being oblivious of the need to comply, announced after the deal was closed that the company may extend the dividends at the rate of 50% of its net profit to 2016. The first quarter of this year was one of the most successful in recent years for ALROSA, as well as for the entire diamond market. The miner’s debt in foreign currency reappraised in the wake of the devaluation in 2014 resulted in a net loss “on paper,” and the company, busily decreasing it, is in no hurry to take new loans. Who knows, maybe financial results of ALROSA will be so impressive that the choice between building up dividends and the sale of 8% of its shares will be a real mathematical conundrum, not just a dialectical exercise?
Sergey Bondarenko for Rough & Polished
