IPO “Children’s world”. Generalization

IPO “Children’s world”. Generalization

Moscow. 8 Feb. Retailer Detsky Mir IPO, which was the first in three years large-scale market transaction-oriented foreign investors. The last placement took place about three years ago, when interest in the Russian market has successfully tested the retailer “Lenta”. Although the placement of “Children’s world” was held at the lower end of the announced price range and the company’s valuation was lower than expected by many market participants, the multipliers “Children’s world” turned out to be comparable with the market leaders in the Russian retail “Magnet” and X5 – trillion turnover each.

The price of “Children’s world” in the framework of IPO on the Moscow exchange was set at the level of 85 rubles per share – at the lower end of the range, which initially made 85-105 rubles, and in the course of formation of the order book was twice narrowed up to 85-90 rubles and 85-87 rubles per share.

Selling shareholders are AFK Sistema, the Russia-China investment Fund (which was created along with China Investment Corporation), as well as some management representatives “Children’s world” and “System”. AFK at the end of the IPO, will retain a controlling stake. And RCIF provided to banks-to organizers the option of additional accommodation of up to 15% of the volume of shares sold. The selling shareholders exercise 247 160 million 912 thousand shares (accounting period by 33.55% of the share capital of the company) in case of full exercise of the option, advanced placement, or 216 million 514 thousand 669 shares (29,3%) excluding the option.

IPO volume will be about 21.1 billion rubles in case of full exercise of the option and 18.4 billion roubles without him. The share of “System” in the capital “Children’s world” will be reduced from 72.57% to at least 50% + 1 share (excluding the exercise of the option – to 52.9%), RCIF – from 23.1% to 13.1% (to 14.4% excluding option). Based on the IPO price, the market capitalization of the “Children’s world” will be 62,8 billion rubles.

Investors interviewed by Interfax on the eve of the announcement of the IPO range, expected that the “Children’s world” will be priced higher – 80-100 billion rubles. You can call placement successful if it will pass at a price of 70 billion rubles, or 95 rubles per share, said the analyst of “Veles Capital” Alexander Kostyukov.

Great demand at a modest price

The main demand location of “Children’s world” has provided foreign investors, traditionally passionate stories of Russian retailers. It is the non-residents were the most active participants in the IPO “Tape” three years ago. After that, the Russian company’s massive IPO with a focus on foreigners not performed, but “Children’s world”, seems to have been to revive the tradition.

IPO “Children’s world” has become a classic transaction in the capital markets, what we’ve seen to geopolitical events in early 2014 is evident everywhere: in the number of applications that were filed by the investors, and the geography of demand, said Anton Malkov, head of capital markets, managing Director, Sberbank CIB acted as one of organizers of placing.

According to him, the total shares of the company received more than 80 applications. The geography of demand as follows: about 35 per cent were investors from the UK, about 25 percent of the United States, about 20% – to investors from continental Europe, about 10% came from the Russian investors, said Anton Malkov. According to the RDIF, the transaction, in addition to European and American investors took part, and its traditional partners – middle East funds. On the basis of geography, given Sberbank CIB, they could redeem within 10% of the issued volume.

According to Malkov, accommodation will be a stimulus for other Russian issuers to enter the public markets. “Accommodation at the lower end may not seem too spectacular, but, as a rule, high-quality, long-term investors as a conservative in placing bids, and are focused on the lowest price. To get quality books at the lowest price – it’s a lot of hard work,” said another banker close to the deal.

However, not all observers are full of only positive. “Initially it seemed that the placement of “Children’s world” will be more successful than out in reality – at the lower end of the price range. Apparently, the portfolios of foreign investors have already uploaded the papers of Russian retailers, and they have little opportunity to buy something extra,” – said the head of Department of analytical researches UK “URALSIB” Alexander Golovtsov.

Also, the price of accommodation, he said, could affect generally not too positive news for the sector. “It is evident that consumer demand is improving contrary to expectations and opposite demand weakens, shares of Russian companies of this sector already look quite overbought; so wishing to buy securities of a new player on comparable multiples was not enough,” said he.

“To buy the shares “Children’s world” even at the lower boundary, must be very aggressive to believe in their model of development, otherwise this asset looks overpriced, at least for many Russian investors”, – said the Manager of one of the largest UK.

Assessment at the level of leaders of retail

“Children’s world” has become the only public Russian retailer of children’s goods. For evaluation of companies banks-organizers focused on multiples of five public food retailers (Magnit , X5, Lenta, Dixy, O’key ) and foreign networks of children’s goods. “We assumed the average multipliers, and the multiplier to the parameter of EBITDA, amounted to a 7.1, which is comparable with multipliers leading to the largest retail chains like X5 and Lenta are located in a different segment,” – said the President of Sistema Mikhail Shamolin.

“Grocery retailing is traditionally estimated to be more expensive than the retail non-food, therefore, we believe that from the point of view of multipliers and rates we brand in the market is – and is very well oversubscription was 150%. Of course, we did not screw up the price on the basis of those considerations that investors came and invested in “Children’s world” and should also have the opportunity to earn and we want to earn further along with them,” he said.

Organizers IPO “Children’s world” twice moved the price range during the formation of the order book – in the early weeks of the corridor was narrowed down to 85-90 rubles, and in the closing day of the books – up to 85-87 rubles per share.

The initial price range is 85-105 rubles per share – the number of investors and analysts considered inflated. The announced price was pretty ambitious in light of the fact that the lower boundary of the “Children’s world” is estimated at the level of the leader of the Russian retail segment of the “Magnet” at EV/EBITDA – 2016, and the top prize of “Magnet” exceeded 20%, calculated BCS analyst Marat Ibragimov.

The volume of the shares “Children’s world” in the free float will amount to about $300 million, while the “Magnet” it is equal to $10.5 bn, while X5 Retail – about $3.3 billion, said the analyst. “In addition, it is worth noting that the “Children’s world” will be the only local listing that will restrict access to paper from the international portfolio investors”, – he said.

“Today the stock trading in the world is so global, is so simple and effective that we haven’t seen a big difference and didn’t feel like making an IPO in London or Hong Kong, we’d get some significantly higher rating or higher liquidity. And given the fact that we are on the home market, where legislation is comprehensible to us, the decision was obvious,” – commented the choice of the platform the President “Systems” Michael Shamolin.

“We watched the activities of the Moscow stock exchange for the last several years, we have seen how exchange has made great progress in its effectiveness, legislation was changed, it became easier to order foreign investors to invest directly through the “Moscow exchange” and not through London or Hong Kong or any other platform,” he said.

Waiting for new deals

According to the Chairman of the Board of the Moscow stock exchange Alexander Afanasyev, the shareholders of “Children of the world” deliberately tried to “in simple terms” “find the full, wide-ranging international demand for the local shares on the national platform”. “And it happened, it will happen, it is an absolute trend. I am sure that this will catch up other companies,” he said.

“In the current context of the continuing sanctions, in conditions when for a long time we have been out of the country for economic growth, there has been a very successful placement of a private company, and it happened with the signing of the international Memorandum, with full international marketing, that is, with all of the road show, with oversubscription quite substantial, with a wide range of foreign investors, fairly evenly distributed across all regions, while only in the local papers, only on the national platform,” said Afanasiev.

“We believe that a historic event today, the first post-crisis IPO, which opens up the market for other companies”, – said the head of RDIF Kirill Dmitriev. Participation in IPO “Children’s world”, the first partial output from RCIF investment. According to K. Dmitriev, the yield for the Fund was 90% in dollars. About a year ago RCIF paid “System,” 9,75 billion rubles for 23.1% of the stock of the retailer. Based on the amount of the transaction, “Children’s world” was then valued at 42.2 billion.

“This is not a recent IPO, which we plan to do we AFK “System”, we adopted the strategy on growing the businesses and placing them in the first place, on the Moscow platform,” said Shamolin. In January, the basic owner “Systems” Vladimir Yevtushenkov said that after the “Children’s world” the AFC can bring to the exchange another asset – holding company “Steppe”. According to him, the IPO could take place in late 2017 or early 2018.

“It is too early to talk about IPO of anything. We develop our agri-business, and when it is ready to IPO, we will show what exactly the company will go, what brand, what is the structure and so on. Now about it early to speak,” said Shamolin on Wednesday. In addition to holding “Step” to “System” on a parity basis with the family of Louis-Dreyfus owned manufacturer of grain RZ Agro with a land Bank of 99 thousand hectares. “Steppe” by the end of November had more than 200 thousand hectares of land. “System” will lead to exchange your agribusiness after he reaches a certain size. “The internal target is, but I probably is not going to talk about it publicly,” said Shamolin.

Among the companies of a consumer sector and retail sector, announces the intention to hold an IPO in the coming years, alcohol giant Roust Rustam Tariko who is engaged in the restructuring of the current debt and online retailer Ulmart, dramatically slowed the growth of joint-stock conflict.

The risk of a slowdown

IPO “Children’s world” was discussed 2013. “System” planned to take the company to the stock exchange in the spring window of 2014, but because of the worsening Russian-Ukrainian conflict it closed, barely opened by placing a “Ribbon”.

Although held IPO “Children’s world” called the first “post-crisis” a deal of this magnitude with the participation of foreign investors in the Russian economy and its consumer sector continue to live under the influence of the crisis of reality: the demand is not in a hurry to recover, and retailers are slowing revenue growth. However, the market of children’s goods more sustainable in a crisis, unlike most segments of the retail sector, because people are not inclined to save the children, noted analysts.

“Children’s world” has not yet disclosed the financial performance for the year 2016. In the first nine months its revenue under IFRS increased 36% to 54.2 billion rubles, adjusted EBITDA increased by 56% to 4.7 billion rubles, the profitability of this indicator was 8.7%, compared with 7.4% a year earlier. Net profit of the retailer rose to 1.76 billion RUR 679 million rubles in the first nine months of 2015. According to preliminary estimates, the company’s revenues last year increased by about 30%, to 79.2-79.8 brur, EBITDA remained at the level of 2015 (of 10.2%).

Assessment Ipsos, Comcon, the proportion of “Children’s world” in the specialized retail market of children’s goods in 2015 is 32%, across the market of children’s goods (including Hyper – and supermarkets) – 13%. The nearest competitor – a network “the Ship” – it was 9% and 4% respectively. Group “Detsky Mir” brings together 525 stores 468 stores in Russia and 12 in Kazakhstan under the brand of Detsky Mir, as well as 45 stores under the brand ELC in Russia (as of end of December). The total trading area is 596 thousand square meters.

The retailer focuses on the development of a network in cities with a population over 50 thousand people and today is already present in 171 of the approximately 300 cities that meet this requirement. In 2017-2020 “Children’s world” plans to open 250 new stores, including 70 this year. This means that the rate of expansion will slow in the past year the retailer has opened 100 new outlets.

Banks-organizers IPO “Children’s world” in its review warned investors about the risk of slowing growth in its revenue. Evaluation Morgan Stanley, sales of “Children’s world” this year will slow to 26% from 32% last year. Sales will grow to 100.5 billion rubles from 79.7 billion. A conservative forecast assumes a slowdown to 17%, optimistic – to 31%. Sberbank CIB expects revenue growth retailer by 28%, to 101.8 billion rubles (in 2016 year – 31.4%).

“I want to assure that the company is not at peak growth, the company continues to grow, and many more positive years ahead of us. I am sure that we as shareholders and investors you will be able to earn and continue from the level on which the company was placed today,” said Wednesday the President “Systems” Michael Shamolin.