Russian Companies Come Out Swinging After Election
Big Russian companies have shown they were waiting for the dust to settle from Putin's re-election to announce dramatic, strategic moves.
The most significant development since the election two weeks ago is the reported decision by state banking giant Sberbank (SBER.ME) to move forward with a public share sale that could fetch $6 billion. The offering is not official yet, but detailed leaks to Reuters and the Russian newspaper Vedomosti outline a plan to come to market in late April or May.
The goal is for Sberbank, which holds about half of all Russian retail deposits and makes a third of commercial loans, to divest 7.6% of its equity, leaving the Kremlin with a bare 50% +1 majority. Significant in itself, the Sberbank sale would also be a symbolic starting gun for a broader wave of privatization that Russian officials have valued at $30 billion or more.
Rival state bank VTB (VTBR.ME) also wants to raise billions from selling down to a 50% +1 structure. Chunks of national oil champion Rosneft (RNFTF.PK), pipeline monopoly Transneft and railroad monopolist RZD are also theoretically in the pipeline.
Russian IPOs and big secondary share placements have a pretty dismal record. Even Yandex (YNDX), the Internet search engine that raised $1.3 billion on Nasdaq last May, has slumped 38% from its early trading euphoria. But Sberbank just might be an exception.
Its profit more than doubled last year to north of $10 billion as it finished making provisions for its 2008 losses and the Russian economy got back on a stable post-crisis footing. Chief executive Herman Gref, who took over in 2007, has brought in a bright new management team poached from the likes of McKinsey & Co. and Deutsche Bank. The share price has about rebounded to the level of March 2007, the last time Sberbank came to market in a big way, and an informal poll of experienced Moscow fund managers finds more buyers than sellers.
Russian executives are not snoozing in the oil sector either. Lukoil (LKOD), the country's largest privately owned oil company, announced a whopping $150 billion investment program on March 15 meant to raise crude output by half over the next decade to more than 3 million barrels a day. And by the way it promised to ramp up dividends to 30% of profit over the coming five years. Vagit Alekperov, the tough old-school Siberian oil man who put Lukoil together in the early 1990s and still runs it, was obviously stung by a 5.5% fall in output last year and lousy share performance as a result.
Alekperov, who unveiled the 10-year plan himself, looks to be overcompensating with his new ambitions, which analysts reacted to skeptically and investors shrugged off with no appreciable move in Lukoil's shares. Still his announcement is interesting for at least two reasons. First, it shows the ambition firing the DNA of even the staidest Russian corporations, and their ability to impact world markets by sheer size if nothing else. Lukoil is already the world's No. 6 privately owned oil company. A leap of the size Alekperov envisions would elevate it to super major status on a par with Royal Dutch Shell (RDS-A).
Second, the company is looking for most of its production growth outside Russia, from the Caspian Sea basin to West Africa. Lukoil's single biggest project of the future is the West Qurna 2 field in Iraq, where it plans to sink $25 billion of a projected $125 billion in upstream investment. That should be a blaring wake-up call to Putin that he needs to adjust Russia's punishing tax regime if he wants the country to keep pace with Saudi Arabia as the world's top oil producer.
Russian aluminum colossus Rusal (0486.HK) was meanwhile the scene of a high-impact corporate train wreck as two of its various billionaire shareholders fell out publicly. Rusal, dominated by Oleg Deripaska, became the world's biggest aluminum producer in 2007 by merging with smaller competitor SUAL, controlled by Viktor Vekselberg and Len Blavatnik. (This duo is also in the Russian consortium that has been giving BP (BP) fits at local joint venture TNK-BP.)
Vekselberg took the chairman's role at Rusal, from which he resigned on March 13, citing a "deep crisis" at the company "brought on by the actions of management." Deripaska's office shot back that Vekselberg was a slacker who was about to be dumped as chairman anyway because he did not show up to board meetings.
Rusal, whose shares have slid more than 40% since its own IPO on the Hong Kong exchange in January 2010, is a cautionary tale of how Byzantine oligarch politics and egos can still trump the trend toward professionalism in Russian business. Deripaska, who before the 2008 crisis was grabbing every asset in sight with Kremlin approval, overloaded the company with debt, in part to push a flawed grand vision of merging it with Arctic mining giant Norilsk Nickel to form a de facto national metals conglomerate. But he was effectively resisted at Norilsk by one more billionaire, Vladimir Potanin.
Now Vekselberg and other minority shareholders at Rusal want Deripaska to sell his 25% stake in Norilsk Nickel and use the cash to pay down debt at Rusal. Deripaska, still locked in a virulent conflict with Potanin, has refused. (I did warn that the politics were Byzantine.) For the nonspecialist, it's enough to know that Rusal is a stock to avoid until some grown-ups are ushered back into the room.
All this action in the corporate sector precedes whatever political changes Putin may make once he formally reassumes the presidency in May. Expectations are running high for a government overhaul in the direction of youth and moderate reform. Former finance minister Alexei Kudrin, a Putin insider turned sort-of outsider, said he expects two-thirds of the cabinet to be replaced.
It looks like investors should be paying closer attention in this transitional period.
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