Don’t scare away signs of life in City flotations market

David Hellier
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After several nerve-wracking days’ delay, Alisher Usmanov’s telecoms group Megafon finally launched its London IPO yesterday, giving the moribund market a timely boost ahead of the naturally quiet festive season.

Megafon’s flotation, which is expected to raise more than £1.5bn for the selling shareholders, will run just slightly ahead of the London and Almaty float of another group from central Asia, Kcell, Kazakhstan’s dominant mobile telecoms company.

That two such large industrial groups have chosen London as the place to list their shares is seen by some as a boost to a UK new issues market that has struggled most of the year to get off the ground.

Up until now there have been only four main listings in London, the most prominent of which was Direct Line, the insurance group.

So, two such large groups, floating almost simultaneously, is a big deal and a welcome boost to the City’s deal-starved practitioners.

However, there are those who are concerned by the growing number of companies coming to list in London from Russia or the former Soviet Union states, arguing that they bring with them poor standards of corporate governance.

“Britain’s door is too open to foreign tycoons,” screamed a headline in a UK newspaper earlier this week, above an article that argued that the door should be selectively closed to many foreign-based companies wanting to list here.

Those who hold this view point to the corporate governance failures at a company such as ENRC, whose experience as a listed company in London has been anything but incident free.

When it comes to the experiences of UK investors in new issues, though, foreign-owned companies aren’t the only ones to have given fully rational fund managers reasons to jump off the proverbial cliff.

Those who bought shares at the time of the flotations of Ocado, the internet grocer, Promethean World, the whiteboard maker, and Betfair, the internet gaming group, for example, all have reason to rue the new issues market without having gone anywhere near a company owned or controlled by a foreign tycoon.

I spoke to one UK fund manager last week who hasn’t participated in an IPO for more than two years. He said he wouldn’t return to the market until it was clear that issues were being priced more realistically.

In the case of Megafon and Kcell, both companies are issuing Global Depositary Receipts (GDRs), rather than shares, which means that they will not become part of the FTSE indices that are routinely followed by the UK’s institutional tracker funds. This means the investment will be aimed at professional investors interested in emerging markets stocks. “Usmanov isn’t for everybody,” said a banker yesterday. “But if you think he’s worth backing you will go for this issue.”

Goldman Sachs raised the ante in the corporate governance stakes at Megafon by dropping out of the syndicate, hinting it wasn’t comfortable with the structure of the umbrella group that will own Usmanov’s interests in it and other assets.

That structure, detailed for the first time yesterday, shows that Usmanov will hold 100 per cent of the voting rights despite two partners having a 40 per cent economic interest between them. This seems to have satisfied Morgan Stanley and others.

Back Usmanov or keep your distance. But surely there’s no sense in stopping him listing here.