Strong start to IPO year as Rusal aims for January listing

The aluminium giant seeks to raise at least $1.89 billion and to become the first Russian company to list in Hong Kong.

Investors who had hoped to ease into work in the new year may have to think again -- at least if they are at all interested in initial public offerings in Hong Kong. One of the first companies to hit the market in 2010, United Company Rusal, looks set to require a fair amount of work by potential participants.

The aluminium producer will be the first Russian company to list in Hong Kong, requiring investors and analysts to get their heads around the political and economic situation in Russia and the outlook for an entirely new currency pair (dollar-rouble). Rusal is also exposed to a number of company specific risks, including the fact that it is currently loss-making and a $4.5 billion loan that under current terms needs to be repaid in less than 10 months. It has stringent covenants and repayment schedules on the rest of its debt that severely limit its operations and its ability to incur new financing. And, there is the ongoing court case against its controlling shareholder Oleg Deripaska, who will hold about 47.5% after the IPO.

In fact, the Hong Kong regulators have deemed the risks to be so high that they have limited the opportunities for local retail investors to participate in the offering. In a controversial move, which has already been criticised by Hong Kong's most prominent shareholder activist, only those who can afford a minimum investment of HK$1 million will be able to participate and there will be no shares earmarked specifically for retail investors, meaning they will have to compete for allocations with the professionals. Retail investors will also be kept at arm's length after the January 27 listing, as each board lot will have a minimum value of $200,000.

But for those who are able to get comfortable with the risks, Rusal offers a chance to buy a share of a company that is highly geared towards aluminium prices -- at a time when aluminium prices are on the rise and commodity analysts are generally positive about the price developments in 2010.

Given its need for significant amounts of fresh capital, Rusal had hoped to go public at the end of last year and went for a first listing hearing in Hong Kong in late November. However, the approval was held up to allow the company to reach an agreement with its domestic and foreign creditors on the restructuring of its $16.8 billion debt and for the Hong Kong Exchanges and Clearing (HKEx) to get comfortable with the extensive documentation. The company finally got the go-ahead just before the holidays, albeit with the earlier mentioned limitations for retail investors.

While this meant that it would be impossible for the company to fit in a pre-marketing period before year-end, Rusal wasn't willing to delay the listing by another few months to give it time to update its financials. Thus, in a highly unusual move, the bankers working on the deal decided to issue a listing prospectus before they even started the pre-marketing so as to meet the December 31 deadline (any later and the June 30, 2009 financials would no longer have been accepted). And since the prospectus needs to include some form of reference price for the listing, they also decided to announce a price range before approaching investors -- other than the cornerstones that are already on board and a few anchor investors that have been given the opportunity to come in and support the deal early on a guaranteed allocation. For now, the range is wide and it is possible that it may be narrowed somewhat before the roadshow and bookbuilding starts on January 12. However, sources say any potential new range will neither exceed nor go below the current range. The final price will be determined by January 22.

This means that even though Rusal is only kicking off the pre-marketing today, investors already have a very good idea of the potential price and valuation, which means they will have plenty of time to decide whether it is a worthwhile deal.

According to the prospectus, which is published online on the HKEx website, Rusal is offering 10.6% of its enlarged share capital or approximately 1.61 billion shares, either in the form of common shares to be listed in Hong Kong or in the form of global depositary shares (one GDS equals 20 common shares) that will be listed on NYSE Euronext in Paris. The price per share has been set in a range between HK$9.10 and HK$12.50, which will give a total deal size between HK$14.65 billion and HK$20.13 billion ($1.89 billion to $2.60 billion).

There is an overallotment option of 225 million shares, representing about 14% of the offering, which could increase the total proceeds to about $2.96 billion.

The current price range values Rusal at an enterprise value-to-Ebitda ratio of 10.6 to 13.3, based on the consensus earnings forecast by the six bookrunners. This compares with an EV/Ebitda ratio for Hong Kong-listed Aluminum Corp of China (Chalco) that ranges between 11.2 and 14.8 depending on the outlook analysts have for the aluminium price. Chalco is significantly smaller than Rusal, but given its Hong Kong listing it is likely to be viewed as the main comparable nevertheless.

One source notes that the bookrunners' earnings forecasts are generally based on a much lower aluminium price than the $2,200 per tonne where it is currently trading. In other words, if it stays around current levels or increases further in 2010, there will be a lot of upside for the current 2010 Ebitda projections of about $2.2 billion. And that would mean the EV/Ebitda multiple will come down. The company is still expected to post a net loss in 2009 - one syndicate research report estimates the shortfall at about $690 million - although this will be a significant improvement on 2008 when falling aluminium prices and escalating debt interest costs led to a net loss of $5.9 billion.

Rusal has already secured the support from four cornerstone investors, which have agreed to buy approximately $885 million worth of shares, based on the mid-point of the current offering range, or about 39.4% of the deal. The largest portion by far - 447 million shares or about $665 million worth - will go to Vnesheconombank, which is one of the key vehicles through which the Russian government carries out its investment policy. The other cornerstones are NR Investments, a private investment company owned by Nathaniel Rothschild; and New York-based fund manager Paulson & Co, which will both invest about $100 million; and Malaysian tycoon Robert Kuok who will buy $20 million worth of shares through three different companies he controls. All the cornerstones will be locked up for six months.

Rusal is the largest aluminium producer in the world with a particular focus on the upstream part of the industry. Its core smelters are located in Siberia where they have access to low cost hydro power, giving the company a cost advantage over its sector peers in other countries. With more than 80% of its total production in Siberia, Rusal is also in a good position to sell to China where demand for aluminium remains strong. In 2008 the company produced 4.4 million tonnes of aluminium, followed by 2 million tonnes in the first half of 2009.

All in all, the company has 16 aluminium smelters, 12 alumina refineries and eight bauxite mines worldwide. Its own mines provide close to 80% of the bauxite it needs and it is entirely self-sufficient on alumina. Its 1.8 billion tonnes of bauxite mineral resources and 384 million tonnes of proven and probable bauxite ore reserves are equivalent to more than 80 years of alumina production, based on its 2008 output.

BNP Paribas and Credit Suisse are joint sponsors and joint global coordinators for the listing as well as joint bookrunners together with Bank of America Merrill Lynch, BOC International, Nomura, Renaissance Capital, Sberbank and VTB Capital. N M Rothschild & Sons is acting as a financial adviser to the company.

¬ Haymarket Media Limited. All rights reserved.
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