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Merrill Lynch to manage VTB stake placement

Prime Minister Vladimir Putin has announced that the government has agreed on a structure to sell a 10% stake in Russia’s second largest bank, VTB to a strategic investor, American fund TPG.

Earlier the government had announced three possible sale schemes for the stake – a direct sale of shares in VTB through the governments state assets agency, using state investment bank, Vnesheconombank as an agent, or assigning an investment bank to carry out the placement.

VTB’s President, Andrei Kostin, said the last option was preferred by the bank and added that provided VTB with better opportunities.

"The scheme of the deal has been confirmed by the government in October. We had an opportunity to decide and choose the potential investors. However, before the official decision is taken we need to review all pros and cons of the offers and manage all financial aspects of the deal.”

The government plans to attract at least $3 billion from the sale of state owned shares, which implies a price of at least 8.83 kopecks per share – 18% below current trading price of VTB shares on MICEX – with analysts saying that VTB debt will also be a factor in determining the price.  

Bank of Moscow analyst, Egor Fedorov says expectation of the placement has lifted VTB’s share price

“Actually, the government offered VTB's shares last year at 4.82 kopecks and bought 99% of a new issue on the open market. Now VTB's shares are at 10.7 kopecks. Since VTB's privatisation process started, VTB shares have lifted by 20% on the back of investor belief in the success of this deal.”

Fedorov added that the turnaround in the fortunes of VTB since the IPO of 2007 is a further underlying boost for the banks share price.

“Since 2007 the situation in VTB has improved significantly. VTB's management showed excellent results in investment and retail business. The cooperation of investment and corporate business as expected will show bright results also. The near term implication of the privatisation deal baked in the current price – investors expect new banking success story and VTB is the number 1 candidate.”

Fedorov also noted that the placement to TPG is also likely to help the government avoid putting pressure on VTB’s share price, in the wake of its IPO in 2007, which saw a number of small investors encouraged to buy shares only to see them drop significantly in value.

“The Government has a huge pipeline of new Privatisation targets. The sale of 10% of VTB is the first attempt to sell to investors considerable assets since the widely criticized Peoples IPO in Russia in 2007.  The sale of the 10% stake in VTB is a pilot project for the new privatization wave, and the Government, which owns 85.5% of VTB, wants the privatization of the VTB stake to be seen to be a success. The simplest way to demonstrate this is to increase the VTB share price above 13.6 kopecks – the 2007 IPO level. The sale of 10% (worth more than $3 billion) directly on the open market could put pressure on outstanding shares.”

The government has assigned Merrill Lynch Securities as a main deal consultant and organizer. The transaction will take place under Russian law, meaning the state will not be forced to sell part of state-owned VTB shares at a public.  VTB President, Andrei Kostin believes the process will be a role model for the new privatization round.

“In my opinion, this is an achievement; in fact, we are creating a new model for future privatization deals on the most favorable conditions for Russia”

Unicredit securities, Rustam Botishev in a research note on Tuesday said the choice of Merrill Lynch was positive but also warned against expecting a rapid conclusion.

“Choosing a world-class investment bank as a sales agent increases the government‘ s chances of selling its stake in VTB and we see this as positive news. However, given that it is just another step in divesting the shares, we expect no immediate reaction in the stock. We anticipate a flood of this kind of news and speculations to continue hitting the wires until the deal actually takes place, which is unlikely to happen this year, in our view.”