FOCUS: Euroset Eyes IPO, Strong Interest Expected from Investors"
MOSCOW, May 6 (Prime-Tass) -- The booming Russian stock market and foreign investors? strong interest have encouraged Russia?s largest mobile handset retailer Euroset to make an initial public offering (IPO). Analysts expect Euroset's IPO to be successful as investors are naturally drawn to new names in fast-growing and diversified retail businesses.
Euroset's sales amounted to U.S. $2.574 billion in 2005, up from $968 million in 2004. The company posted sales of $845 million in January-March, up from about $397 million in January-March 2005, while the number of sales outlets rose to 3,414 outlets as of April 1 from 3,111 stores as of January 1.
The net profit of Euroset amounted to $12 million in January-March, the company's Chairman Yevgeny Chichvarkin told the Russian Economic Forum in London last month. He did not provide comparisons but analysts believe that the retailer has never turned a net profit before as it was aggressively investing in expansion.
Euroset operates outlets in Russia, Belarus, Ukraine, Kazakhstan and Kyrgyzstan. In May, Euroset plans to start operations in Estonia, Chichvarkin said, adding that the company is also interested in operating in Uzbekistan.
"Taking into account that the market has been buying up everything it is offered, any company now has chances to make a good placement. The retail sector is very popular among investors," Alexei Yazikov, retail and banking analyst at Aton Capital, said.
Euroset hopes to make an IPO in late 2006 or early 2007 on a Russian stock exchange, Chichvarkin said last most month. "It will be a stake large enough to make the stock liquid," Chichvarkin said without elaborating. ?We will definitely have it in Russia, I don?t know about London yet,? he added.
The company's Financial Director Ruslan Gareyev said in March that Euroset planned to offer investors 10%-15% of its shares in late 2006 and that the IPO might take place on the London Stock Exchange (LSE).
This week Russian media reported that Deutsche Bank and Uralsib Financial Corporation are expected to be appointed as the lead managers for the IPO and that the company may offer up to 20% of its shares on the LSE.
In March Russia's UralSib bought 7.53% in Euroset for $50 million. It was not clear who the seller was. Before March Chichvarkin and a member of the board of directors, Timur Artemyev, controlled Euroset on parity basis through a chain of offshore companies.
Based on Uralsib?s transaction the company?s total value amounts to $665 million. However, that was not a direct purchase, as UralSib got the stake after converting a $50 million loan it disbursed to the retailer in October 2005. According to Gareyev, Euroset's total value amounts to between $2 billion and $3.5 billion. Euroset's value may be even higher when it makes the offering as the company is diversifying its business operations and is growing at a fast pace, analysts said.
"We have plans to make an IPO, but they are not yet finalized," Tatyana Gulyayeva, Euroset's press secretary said this week, adding that the IPO is more likely to take place in Russia. She refused to elaborate further on the issue.
Euroset may not be able to meet the necessary requirements to make an IPO abroad, analysts said.
"To make an IPO abroad the company needs to have its financial results audited for three years in a row," Sergei Savin, analyst for J'son & Partners, said, adding that a 2006 date for Euroset?s IPO seems overly optimistic and the offering is more likely to take place in Russia in 2007.
Euroset has already had its financials audited for 2005, Chichvarkin said in a recent magazine interview. The audit was undertaken by PricewaterhouseCoopers, he said, adding that an IPO on the foreign markets is possible in 2008, but it is likely to take place in Russia earlier.
Russian mobile retailers started to diversify their businesses several years ago, when they introduced to their product ranges various small-sized electronics equipment, such as MP3 players and digital cameras. Euroset made several more steps in this direction this year, having started to sell in its outlets air tickets and tickets for various sports, music and entertainment events.
"These are niche pilot projects. We will see whether they are effective and if they are, we will continue these activities," Gulyayeva of Euroset said.
Analysts were positive above the prospects for diversification. "Since 2004 all retailers have been taking steps in order to optimize their operations. Euroset is constantly looking for ways to boost growth in a market that is near saturation, in which profitability growth is decelerating," Savin of J'son&Partners said.
"Sales of tickets to entertainment events has a good outlook, as young people are very active in using mobile services and Euroset has a wide chain of outlets," Savin said, adding that tickets sales are still unlikely to account for a large share of the company's revenues.
Yazikov of Aton Capital said that Euroset might further diversify its business operations. "The company has outlets across almost all of Russia and may sell almost everything that does not require large storage facilities," Yazikov said. "In fact, it does not buy anything and acts as a distributor and gets fees," he added.
But analysts from Sotovik research agency are less optimistic about the diversification saying that non-core sales could not account for a major share of mobile handset retailers' profits.
The share of mobile handsets sales in the net profit of Russian handset retailers is likely to grow to 48% in 2008 from 42% in 2005, the share of mobile handset accessories is to increase to 14% from 13%, while the share of profit from SIM card sales and payments for mobile services is expected to fall to 32% from 40%, Sotovik said in April. The share of net profit from other activities is expected to increase marginally to 6% from 5%, Sotovik added.
Although Euroset looks like a solid and transparent company to invest in, analysts warn that the Russian mobile handset market has been working under gray import schemes for a long period of time and only in 2005 did major retailers, including Euroset, start moving to legal operating schemes.
"There is some uncertainty on the market after the Motorola case. It is a negative factor, suppressing foreign investors' interest in the Russian (mobile handset retail) market. If (Euroset) proves that it has resources to solve the problems (with the customs service and police), it may persuade investors to invest in the stock," Savin of J'son&Partners said.
The Russian police and customs service launched a campaign against illegal imports of mobile handsets in August 2005, which resulted in major players switching to direct imports of handsets. However, when Euroset recently imported a batch of Motorola handsets, they were seized and later found by the police to pose a threat to health. About one-third of the imported batch, estimated at about $19 million, was later destroyed, while the fate of the remaining portion of handsets is unclear.
End"
Posted to the site on 8th May 2006
