Q&A with Olexander Zadorzhnyy, a lawyer from German-based international law firm Noerr on the benefits of raising money on alternative exchanges.
In early October, Agroton, one of the biggest agricultural producers in eastern Ukraine, announced plans to place shares on a foreign stock exchange. The company expects to raise $60 million for a 26.2 percent stake on the Warsaw Stock Exchange.
Agroton is one of few Ukrainian companies carrying out plans to conduct an initial public offering this year. It is the latest agriculture company to go to the market after Avangard and Kernel raised over $250 million between them in placements earlier this year.
With many initial public offerings postponed this year, could 2011 be a boom year for IPOs? Is the Agroton placement in Warsaw is part of a trend of turning to alternative exchanges?
The Kyiv Post sat down with Olexander Zadorozhnyy, a lawyer from German-based international law firm Noerr, to get some answers.
Kyiv Post: Many Ukrainian companies that planned to conduct an IPO in 2010 postponed their plans until 2011. Do you expect them to make it happen in 2011?
Olexander Zadorozhnyy: Today we are witnessing a certain “revival” of the stock markets globally. The investors seem to be regaining interest and more funds to invest are appearing. However, it is difficult to predict whether this trend will continue in 2011. If we witness further growth in investor activity in the following year, we may see some IPOs of Ukrainian companies afterwards.
If the market demonstrates a certain “cooling,” the companies will most likely seek other sources of financing, such as issuing bonds, private placements etc. The potential IPO candidates are very sensitive to the market conditions and watch those carefully; if these are bad or unclear in their opinion, the decision on IPO will most likely be postponed, if not cancelled at all.
KP: How do companies choose where to conduct an IPO?
OZ: The choice of an appropriate venue for an IPO depends on a number of factors. First of all, it is the price of listing and associated expenses (preparation of documents, services of consultants, auditors and lawyers, fees of the stock exchange etc.).
Second, the liquidity of the market in general and the stock exchange in particular, in other words how much the company will be able to raise as a result of an IPO.
Third, the overall readiness of the company for an IPO is essential: how prepared the company is, how reorganized it is to meet the requirements, how transparent it is and so on.
Finally, objective factors such as prestige – for example, London is perceived to be more prestigious than other European stock exchanges – and the specialization of a certain market – Warsaw is more specialized for agricultural companies – also play a role here.
KP: London is a popular destination for Ukrainian IPOs. Do you see a rise in activity on other exchanges – London AIM, Warsaw and Frankfurt? Are there any alternatives for those three? What advantages does each hold?
OZ: London was traditionally perceived as a success sign among Russian and Ukrainian companies. However, taking into consideration the cost of an IPO on the London Stock Exchange, many Ukrainian companies are looking more towards Frankfurt and Warsaw Stock Exchanges. London’s AIM is also an option.
Each of these exchanges offers its advantages. The common advantage is the lower cost of listing and related expenses. Frankfurt offers a higher liquidity and a broader range of potential investors. Warsaw has more understanding of the business peculiarities from the side of Polish investors and a more specialized market for certain companies (e.g. agriculture).
While these three “alternative” destinations remain popular among Ukrainian companies, due to economic and political reasons Russian stock exchanges (such as the RTS and the MICEX) might attract more interest in the upcoming years.
The advantages of the latter are clear: the higher interest of investors and the growing liquidity. At the same time, we may witness some IPOs on Asian stock exchanges, such as the Hong Kong and Singapore. Asia offers a substantial advantage of liquidity while the interest from the side of investors towards Ukrainian companies is still rather questionable. Apart from the above options, Ukrainian stock exchanges also are the focus of certain companies.
KP: When did interest in these exchanges begin and why?
OZ: The interest in these exchanges started as Ukrainian companies began to look at different ways of attracting additional financing using the capital markets several years ago. Most candidates seem to be analyzing several possible options before adopting the final decision to list their securities abroad.
While certain exchanges are active in carrying out different educative seminars and conferences for potential issuers, the others seem to be successful in completing large IPOs, which serve as a benchmark for judging their success and an effective tool to attract potential issuers.
KP: What are the advantages of listing on a smaller exchange? Why would a company choose a smaller exchange? As a stepping stone, or an end goal?
OZ: One of the advantages of being listed on a smaller exchange is typically a more specific interest of investors towards a certain segment of economy or towards a certain peer group of companies.
Second, the requirements towards the prospectus for listing and the reporting requirements may be lower than on large stock exchanges.
Third, the listing on a smaller stock exchange is more likely to be completed in a shorter time and with less considerable expenses.
A company can later adopt a decision to transfer its listing to a larger stock exchange. Whether listing on a smaller exchange is a stepping stone or an end goal depends on the company in every single case. We have witnessed very rare occasions where it would be just a stepping stone. However, it can sometimes be used as a tool for measuring the interest of investors towards the company.
KP: What are legal challenges for IPO of Ukrainian companies on foreign markets? What steps have to be taken to prepare a company? How long does it take? Is it quicker than for a bigger exchange?
OZ: One of the biggest challenges for an IPO of a Ukrainian company on foreign market is the corporate governance: how the company is built internally. Many Ukrainian companies therefore need restructuring before a foreign IPO.
Transparency requirements have to be met. After a company has gone public it has to report almost on everything that happens in it; investor relations service has to be put in place and has to be operating. Many Ukrainian companies are not used to doing that and have a hard time adjusting to it.
International accounting and reporting standards also have to be in place, which is often an obstacle, as Ukrainian companies generally do not keep their books according to internationally recognized standards.
Therefore, in order to prepare a Ukrainian company for an IPO, a number of steps have to be taken, among which the most important are the corporate restructuring; implementation of transparent business practice and implementation of accounting and financial reporting according to international standards. The process of preparation may take from nine to 12 months for larger exchanges and from six to nine months for smaller exchanges and depends in each case on the requirements of the particular stock exchange.
KP: Companies from which sectors of the economy are most likely to list abroad?
OZ: In our opinion, the most likely candidates for a foreign listing are the Ukrainian agricultural businesses, as well as large energy companies and metallurgical industry enterprises.
Kyiv Post staff writer Olga Gnativ can be reached at [email protected]
