Rusal pulls off world's largest IPO so far this year

United Company Rusal will become the first Russian company to list in Hong Kong on Wednesday after it overcame the scepticism and negative press related to its debt situation and the structure of the deal to raise HK$17.4 billion ($2.24 billion) from its initial public offering. At that size, it is not only the largest new listing in Hong Kong by an issuer from outside Greater China, but also the largest IPO globally year-to-date.

The offering was priced at HK$10.80 per share, which was the mid-point of the original price range, but the bottom of the slightly tighter guidance range of HK$10.80 to HK$12 that the bookrunners went out with towards the end of the bookbuilding.

More than 350 institutional investors came into the deal, which was more than two times covered thanks to support from a couple of significant anchor orders, according to sources. Or, close to three times if you take out the cornerstone tranche, which accounted for 39.5% of the transaction.

The demand was divided quite well between Asia, Europe and the US, although some people familiar with the transaction noted that Europe stood out with 30%-40% of the order amount. One reason for that was the demand from Russian investors, which was described as "material", but not out of proportion with the rest of the orders. The deal also attracted a number of Middle Eastern accounts, which isn't that common for Hong Kong IPOs. In terms of investor type, long-only funds, sovereign wealth funds, global macro funds, hedge funds and very exclusive private wealth investors were all part of the mix.

The interest likely had less to do with the novelty of a Russian company listing in Hong Kong than the fact that Rusal is the largest aluminium producer in the world and analysts believe that, with the gradual recovery in the global economy, the demand for the metal is expected to continue to increase.

In an interview with FinanceAsia just ahead of the formal launch of the IPO, Rusal's deputy CEO Artem Volynets noted that aluminium is one of the most rewarding commodities to invest in at the bottom of an economic cycle as it is more geared towards economic growth than most other commodities. According to Volynets, for every 1% economic growth, you get 2.4% growth in the demand for aluminium.

The key reason is that transport (including car manufacturing) and construction, which are the two key demand sectors with 50% of global aluminium consumption, were the most hit in the recession. Thus, when the cycle turns, they are coming back strongly resulting in strong demand as the global supply chain restocks. Aluminium prices have already been rising in recent months, but most observers expect them to continue to head higher over the course of this year as demand outstrips supply.

Aside from its listing in Hong Kong, Rusal will also trade on Euronext in Paris. While this means that the liquidity in its shares will be split into two parts, Volynets said Rusal wanted to stress the global nature of the company and give its European shareholders a chance to trade its shares in their own time zone. Based on early indications as the allocation of the deal began on Friday, a large majority of the shares will trade in Hong Kong, however.

Investors who chose to get their allocations in global depository receipts for listing in Paris will pay €19.91 ($28.08) per GDS. Each GDS accounts for 20 common shares listed in Hong Kong.

Rusal sold 10.6% of its enlarged share capital, or approximately 1.61 billion new shares. There is an overallotment option of 225 million shares, representing about 14% of the offering, which could increase the total proceeds to about $2.55 billion.

The IPO price values Rusal at an enterprise value-to-Ebitda multiple of 11.7 times based on the consensus estimates by the joint bookrunners. This puts it at a premium to Hong Kong-listed Aluminum Corp of China (Chalco), which were viewed as the main benchmark and according to the same sources trade at a 2010 EV/Ebitda multiple of 10.2. Chalco's share price dropped about 15% during the marketing of Rusal, which reduced the attractiveness of the newcomer and made the deal that little bit harder to sell. The final week of marketing also coincided with a tough week for Hong Kong stocks in general.

The Hong Kong stock exchange has worked hard in recent years to broaden the line-up of new listings beyond companies from Greater China. So far the interest has been slim, aside from the odd Australian and Malaysian companies, but with Rusal it has finally taken a step forward in its ambitions to become an alternative to the London Stock Exchange. However, Rusal's large debts - it still has $14.9 billion of borrowings, which it has committed to reduce to $9.9 billion in the next five years - and other concerns, including an ongoing court case against its controlling shareholder Oleg Deripaska, prompted the Hong Kong exchange to restrict the offering to institutional and professional retail investors only.

Only those who could afford a minimum investment of HK$1 million were able to participate and there were no shares earmarked for retail investors, meaning they had to compete for allocations with the professionals. This meant that most of Hong Kong's keen retail investors weren't able to participate in this historic deal at all. And it will get no easier once the stock starts trading. With each board lot consisting of 24,000 shares, the price for one single lot will be close to HK$260,000 at the time of listing. It may be that the exchange was trying to protect retail investors from potential risks and losses, but if aluminium prices continue to rise and has the predicted leveraged impact on Rusal's earnings, it is doubtful whether the retail investors who missed out will be particularly grateful.

Rusal isn't the only commodities company from an unusual geography to list in Hong Kong this week, however. Mongolia-based coal miner SouthGobi Energy Resources will debut on Friday after raising HK$2.89 billion ($373 million) from a share sale that was very well received. While it has all its mining operations in Mongolia, the company is really Canadian and it is already listed in Toronto. This means that technically its share sale wasn't an IPO, although the marketing and structure of the deal was almost the same as if it had been.

One difference was that the deal was marketed against a live share price in Toronto, although sources said that the stock is so illiquid that most investors paid little attention to it and chose to submit their orders at an absolute price anyway. In fact, most investors put their orders at strike, which meant there was hardly any price sensitivity in the deal. Instead of setting a price range for the share offer, SouthGobi also offered its shares at a maximum price of C$17 apiece. At the beginning of the bookbuilding this translated into HK$133.50 per share, but thanks to a weakening of the Canadian dollar during the marketing period, the price in Hong Kong dollars came down slightly. So, even though SouthGobi priced the offering at the top of the range (at C$17) investors only had to pay HK$126.04 per share.

Ten percent of the deal was allocated to Canadian investors - down from 15% initially indicated -- and of the remaining 90%, Hong Kong retail investors ended up with 30% after they subscribed to more than 20 times the shares initially earmarked for them, triggering an increase of the retail tranche from the initial 10%.  The institutional offering was said to have been more than 10 times covered, although no specific numbers were released.

SouthGobi sold 16.8% of its enlarged share capital, or 22.95 million new shares. There is also a 15% greenshoe that may increase the total proceeds to $429 million. Citi and Macquarie were joint bookrunners for the offering.

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. NM Rothschild & Sons is acting as a financial adviser to the company.