The March of enthusiasts

IPOs (initial public offerings) are the hit of the season. The current fashion is to get a listing on an exchange, but short of this, you should at least declare your intention to do so. The formal side of this process is that companies need additional capital, while society requires these companies to be transparent. However, these are not the only reasons that domestic companies are seeking listings on an organized market.

Yelena Dudka

The first question: Why now? Historically, our securities market developed as a debt market, as almost none of the owners of large enterprises wished to share their authorities with unknown parties by selling shares on the open market. Now, all of the sudden we are able to observe such enthusiasm. Why they have chosen to do this now can be explained by several reasons. First of all, there is a big demand for the shares of companies from oil-producing Russia and Kazakhstan. Secondly, at present companies have already used up all possibilities for external borrowing, and for their further development are willing to sacrifice a couple of seats on their boards of directors. Thirdly, a good example is simply infectious, and after the IPOs of Kazakhmys and Kazakhaltyn, some advanced JSCs (joint stock companies) have been asking the question, “Are we worse than them?”
Aside from this, issuers moods have been influenced by the government’s campaign against further increases in the nation’s external debt by banks and enterprises. And finally, some enterprises may seek to take some of their assets far away from internal political risks, such as the future presidential election, the results of which nobody can even guess.
Thus far, the following companies have publicly declared their intentions to carry out an IPO: JSC Exploration and Production KazMunayGas (EP KMG); a metallurgic holding company that is being formed, which combines the assets of Eurasian Industrial Association (EIA); Air Astana airline; and, the largest of the domestic banks. According to expert opinion, at least ten Kazakhstani companies are preparing for IPOs, and at least an equal number of companies are considering such a possibility.
What goals do these companies hope to achieve when making an IPO? The simplest and most understandable one, but not the single or most important, is attracting capital for further development of the business. By offering shares on the open market, companies may receive more capital, which is, most importantly, cheaper than on the debt market. To be honest, expenses association in arranging an IPO on a foreign market are much higher than getting any kind of loan. Indeed, this number can reach up to 10% of the amount attracted (taking into account that large companies list shares amounting to billions of dollars, associated costs can reach into the tens or hundreds of millions of dollars). In such cases, funds received from the sale of shares, as compared with loans, are not repaid with interest. An interesting question is whether or not our companies will pay dividends to new shareholders. Generally, in Kazakhstan such a practice is not followed.
Another declared goal of IPOs (though, this is more likely a compulsory condition) is achieving that transparency long wished after by society. If one listens to future issuers, one should imagine that listing on the LSE (London Stock Exchange) is simply a company striptease. However, experienced financial consultants teach their clients how the latter should bare himself in order to remain “dressed” to a certain extent. “For companies that are going public, learning how to be transparent, while not becoming vulnerable, is important – they need to find a golden midpoint between the necessity to disclose more information, while at the same time not showing all their cards to competitors and other parties,” advises a Russian consulting firm.
In the West, people understand that transparency is a relative term. Confirmation for this lay in the scandals opened to the whole world, such as those with Enron (concealing of information), Refco (embezzlement by the company’s head), and other large public enterprises.  Russian analysts acknowledge that the share of shadow businesses in the country is traditionally high, and that the majority of companies, including those doing IPOs, utilize various kinds of “opaque” schemes. Buyers of these shares take into consideration such risks, along with corruption and other peculiarities of the Russian economy. The situation in Kazakhstan as regards this issue, hardly differs from that in Russia. This is why no one can guarantee that we will finally discover what is occurring in the Kazakhstani state-operated companies following their listings abroad.
Particularly, doubts exist that after an IPO we will know the real ownership structure. To be more exact, information on shareholders will be disclosed, yet nobody excludes the possibility that the names will not tell much, since the real investors will be concealed behind a thick layer of figureheads and shell companies. Certainly, issuers will have to disclose more information about themselves than they do at present. However, one should understand that there will not be any absolute transparency, as company owners like to present in the mass media – first and foremost being the government, which plans on selling some of the state’s holdings on foreign stock exchanges.
None of our issuers have declared any other goals for doing an IPO, other than attracting additional resources and transparency. Meanwhile, IPOs are widely used by owners as an exit from the business. Public offerings help them to most accurately evaluate their companies, while maximizing their take. Usually, companies put from 15% to30% of their shares on the block. Analysts believe that if the block offered up for sale is less than the abovementioned range, then the issue may not be interesting for investors. And, if the amount offered is too high, potential investors become wary, giving the impression that the owners are trying to rid themselves of their shares for some reason.
Last year, Russian companies offered blocks of shares ranging from 7% to 35%. Our companies, Kazakhmys and Kazakhaltyn sold off 30.5% and 25%, respectively. EP KMG has declared its intention to sell off around 49% of shares. This, in theory, gives pause for thought. First of all, this company holds oilfields that have been under development for more than 40 years. These fields mostly contain hard to reach reserves in relatively small quantities. Geologists believe that new pockets can be found in such places, but that sort of venture requires huge expenses for carrying out exploration. This is why it is quite possible that the government is carrying out an IPO of this company with the final goal of selling it off completely.
Another variant is the sale of state shares to the top managers of the companies, or other interested parties, through the IPO mechanism. Such cases are known to have occurred in Russia. Case in point, the Russian mass media made claims that a significant portion of the recent issue of shares in Rambler, were purchased by the owners themselves. When Rosneft announced that part of its shares would be put up in a domestic private issue, analysts immediately assumed that this would be a good way for top managers of the company to buy some part of the shares during the IPO, and, through this method, become the legal owners of the company.
Our many references to Russia can be explained by the fact that as of today, the country has achieved a rich experience in carrying out IPOs, and has, as well, a similar economy to that of Kazakhstan. In 2004, six Russian companies were listed (the volume of capital attracted was US$860 mln), in 2005 – 13 companies (US$5.2 bln), and at the beginning of 2006, more than 40 JSCs made their intention to list known. This year, Rosneft alone received US$10.4 bln in its IPO. Several state-operated companies have declared the plans to go public: VneshTorgBank (VTG), KamAZ, RAO EAS, and Russian Railways (which, like EP KMG, are ready to part with 49% of their shares).
Andre Illarionov, a well-known opposition economist in Russia, called the IPOs of Russian state companies, “the third, the most larcenous privatization, from which society, represented by the state, will not receive even a single kopek.” According to him, during the first privatization, the citizens received vouchers, during the second one (in which foreclosed property was sold), the state received “some funds”,  and from this one they will receive nothing. He says, “If the IPO of Rosneft takes place, it will be the fraud of the year.”
IPOs of state companies are nothing but partial privatization. If almost half of the block of shares (especially of some large, oil-producing company) is sold to some strategic investor, this would create many disputes. As well, many questions would appear, including those concerning to whom it was sold, and how much money was received by the state budget. Now, shares can easily be purchased through brokers buy anybody, and the government will not receive anything from this. Meanwhile, the opinion of society remains positive. The shares were listed abroad, attracted a lot of capital for the development of the state enterprise – good boys.
At the same time, one may not freely agree with Mr. Illarionov that IPOs for state companies are totally fraudulent, and will not bring society, as represented by the state, any benefits. Sale of stock is not a closed auction. One cannot by the best company cheap here. The only possibility for the top management of a company, and other interested parties, to buy the shares of their own company on the stock exchange is to offer the best price for them. This means that one can buy a company quietly, but, in contrast to the former stages of privatization, this must be done with real money.
Those funds that have been attracted will find their way into the domestic economy, resulting in companies increasing their production volumes, tax payments, number of employees, and so on. Since now it will be a public company, the enterprise will have to publish and distribute its audited reports, informing shareholders about how effectively the capital that have been attracted is being used. Though, one should note that if the top managers of the company become its shareholders, there will be no guarantee of the transparency of that kind of information, merely a show of information. In principle, the capital invested by the new owners in acquiring shares can be partially recuperated in the future. If one looks at the issue in this way, the state does not really gain any benefit from privatization, either directly or indirectly.
This is of course the most pessimistic scenario, technically possible, but not a foregone conclusion. However, society will hardly have the chance to learn the reality of which scenario our national companies will use in doing IPOs. When I say “ours”,  I do not mean domestic companies in general, but state-owned ones, which used to belong to us as a society.
One more reason for having an IPO was mentioned at the beginning of the present article, which is minimization of political risk for the company by way of moving assets abroad. At the time when Kazakhstani banks began actively courting EBRD and other financial institutions as shareholders, an opinion existed that by doing this the banks were attempting to gather foreign support in case of internal political pressure. Why should companies not take the same approach, especially if the shares will be bought out by the top managers through third parties, resulting in removal of some assets from Kazakhstani jurisdiction. Simply put, pulling capital out of the country.

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