Platt, Gordon

CORPORATE FINANCING FOCUS

Russian energy companies, as well as banks and industrial corporations, are scheduled to raise billions of dollars of capital in the global depositary receipt, or GDR, markets in London and Luxembourg this year, bankers say. "Russian companies will dominate capital-raising in the form of depositary receipts in 2006," says Patrick Colle, global head of ADRs at JPMorgan. Colle is based in London, where the US bank manages about 70 blue-chip ADR programs.

While the overall number of initial public offerings and follow-on stock issues from Asian companies may be larger, the value of new issues from Russia will be far greater this year, Colle says. The planned London Stock Exchange listing of Rosneft, the Russian oil company that purchased the assets of Yukos last year, is expected to raise as much as $15 billion in June, making it one of the largest IPOs ever.

The value of GDRs traded on the London exchange last year surged 166% to $226 billion, and much of this activity was in shares of Russian companies such as Lukoil, Gazprom and Unified Energy Systems. In December 2005 Russia's Novolipetsk Iron & Steel raised $609 million in its London listing, which valued the company at about $15 billion. "The float from these GDR issues usually ends up in London, which is contributing to the surge in trading volume on the LSE," Colle says.

"A major trend in the market for depositary receipts in general is toward GDRs and away from ADRs," Colle says. This is due in part to the fact that ADRs require the issuing company to adhere to US accounting standards and to register with the Securities and Exchange Commission in the case of exchange-traded securities, he says.

Some foreign companies listed on US exchanges have found it extremely difficult to de-register with the SEC, unless they have fewer than 300 US shareholders or their trading volume in the US is less than 5% of total trading in their shares.

SEC Opens the Exit Door

It remains to be seen if there will be an exodus of foreignbased companies from US exchanges if the secs proposed rule changes to streamline the process for de-listing from a national securities exchange and deregistering securities under Section 15(d) of the Exchange Act are adopted next month. Under the new rules, an issuer can de-list or deregister securities by filing an application on Form 25 with the sec via the agency's electronic system known as Edgar. The company must notify the exchange where it is listed and issue a press release on its website at least 10 days prior to filing a Form 25.

Any company registered with the sec, regardless of whether it is listed in the US or not, must comply with the Sarbanes-Oxley Act. The New York Stock Exchange already has seen a dramatic slowdown in non-US listings in the past few years as European companies in particular have sought to avoid the costs of compliance with Sarbanes-Oxley.

"For many companies, a US listing has a lot of merit," Colle says. "Every company is different." A de-listing will not necessarily mean a termination of the company's ADR program, he says. A company could decide to de-list from a US exchange and still keep its ADR program in the overthe-counter market.

Using GDRs, it is relatively easy for a company to raise capital quickly. US accounting rules compliance is not required, and the entire process is less costly and less burdensome, Colle says. "More than half of the capital raised worldwide in 2005 came from GDRs for the first time ever," he says.

Still Room to Grow

Meanwhile, the level of US investment in equity abroad is at an all-time high of $2.8 trillion, or 15.8% of portfolio allocation, which is also a record. The appetite from US investors for foreign equity continues to be strong, and there is room for further growth, with modern portfolio theory recommending 25% exposure to foreign stocks for diversification purposes, Colle says. "A tree doesn't grow to the sky," he says. "The question is where the growth ends."

And while demand remains strong for DRs, an even more striking story of growth can be seen on the supply side, according to Colle. "An inflection point was reached in 2005 when the $20 billion of capital raised through DRs was twice the level of the year before," he says.

The Asia-Pacific region accounted for 77% of global DR capital-raisings from 2003 through 2005, and the demand from this region will remain strong, Colle says. "The story of China last year was of very big bank and energy privatization IPOs tapping the DR market," he says. "Contrary to two years ago, or even one year ago, none of them listed in the US because of the requirements and costs of Sarbanes-Oxley."

Russia Sets Limits

Russian authorities have set a new limit of 35% on the proportion of total capital companies can raise in the form of depositary receipts. On January 17 Russia's Federal Financial Markets Service announced the tighter limit, which is down from 40% previously.

In addition to lowering the limit for DRs issued on foreign stock markets, Russia is obligating domestic companies to issue 30% of their shares on local stock markets in the course of their initial public offerings. The measures are designed to strengthen Russia's stock markets, which are too thin to handle major privatization issues.

While Russian companies are expected to lead DR capital-raisings in 2006, a flurry of recent issues has come from modest-size technology companies in South Korea and Taiwan. On January 23, JPMorgan announced the launch of a Luxembourg-traded GDR program in connection with a $103.6 million offering by Powertech Technology, an issue in which it invested an additional $12 million by exercising its "greenshoe," or over-allotment, allowance. The Taiwan-based company assembles, sorts and tests memory devices and products. Earlier in January JPMorgan initiated a $28.7 million GDR program, also traded on the Luxembourg Stock Exchange, for Taiwan Kolin, which makes color televisions, video recorders, refrigerators and air conditioners.

In December, JPMorgan launched Nasdaq-listed ADR programs for two South Korean-based companies, in which the bank also invested by exercising its greenshoe options as underwriter. Seoul-based WiderThan, which made a $72 million initial public offering, provides programs that enable mobile-phone users to download music tones, games and information. Pixelplus raised $36 million in its IPO. The company designs and markets image sensors for use in mobile camera phones.

Latin American Steel Giant

Forged by Argentina's Group Techint from steel producers in Venezuela, Mexico and Argentina, Ternium raised about $497 million by selling 24.8 million ADRs at $20 each. Ternium, Latin America's second-largest steelmaker, began trading on the New York Stock Exchange on January 31 and posted a first-day gain of 17%.

Techint sold a 12% interest in Ternium, which owns 70% of Mexico's Hylsamex, 56% of Argentina's Siderar and 77% of Venezuela's Amazonia. The latter company controls Sidor, or Siderurgica del Orinoco of Venezuela.

Bear Stearns, which initiated research coverage of Ternium on February 3 with an "outperform" rating, says the company has many positives, including high cash flow, low-cost production, an experienced management team, limited domestic competition in Venezuela and Argentina, and favorable prices in Mexico.

With half of the company's earnings coming from Venezuela, however, the unpredictability and potentially adverse actions of President Hugo Chavez are the biggest key variable for Ternium, according to Bear Stearns analyst Daniel Altaian. Ternium makes steel slabs for the automotive and appliance industries.

Overall Latin American equity capital market volume totaled more than $1.5 billion for the period between January 1 and February 8, according to Dealogic. That was a five-fold increase from $246 million in the same period a year earlier.

Successor Depositaries

A number of major companies have selected new depositaries for their ADR programs so far this year. British Airways appointed Citigroup as successor depositary for its ADRs, which trade on the New York Stock Exchange.

Koninklijke KPN, the Netherlands-based telecommunications company, appointed JPMorgan to handle its NYSE-listed program. KPN was the sixth blue-chip company to appoint JPMorgan as successor depositary in the past 12 months, according to the bank.

Wal-Mart de Mexico selected The Bank of New York as successor depositary for its ADRs, which trade on the overthe-counter market.

MOL Magyar Olaj-es Gazipari, an oil and gas exploration and production enterprise that is Hungary's biggest company, appointed The Bank of New York as successor depositary for its GDR program. MOL's GDRs are listed on the Luxembourg Stock Exchange and trade on the International Order Book of the London Stock Exchange and on the Portal in the US 144A market. The company's registered shares are traded on the Budapest Stock Exchange.

Munich-based MorphoSys, a biotechnology company that focuses on the use of human and synthetic antibodies for therapeutic and research purposes, launched a sponsored ADR Level I program in the US -with The Bank of New York as depositary. In January MorphoSys announced the acquisition of privately held Serotec, based in Oxford, UK. Serotec, one of the world's leading antibody manufacturers, has a distribution network in the US, Britain, Germany, France and Scandinavia. MorphoSys develops and distributes technologies for the production of new drugs and the discovery of new disease-related target molecules. It recently entered into a global antibody sales agreement with Chemicon, a leading provider of tools used in stem-cell research.

-Gordon Plait

Copyright Global Finance Media Inc. Mar 2006

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