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bne October 2018 Special focus I 31
Russia’s share buybacks are en vogue
What comes down, must go up. That’s how the owners of many of Russia’s biggest corporations are looking at their share price at the moment, many of whom have launched share buybacks in the last year to take advantage of the low price of their stock now.
The attitude of Russian owners to their stock has changed dramatically in the last decade. In the 90s all shares meant was a way to capture the revenue streams of raw material producing cash cows. These days increasingly owners see their shares as a source of capital they can use to pay for acquisitions
or turn into cash on the capital mar- kets. This change is most visible in the extremely high dividends many compa- nies pay, as a way of investing into their stock (and a new more equitable way of extracting cash from a company). How- ever, buybacks serve the same purpose; owners use excess cash to buy up shares, support their share price and invest into the value of their stock.
The most recent example was Russia's second-largest oil company and largest privately owned oil company Lukoil that started the first stage of its $3bn share buyback that was announced earlier this year on September 19 which will run through the end of 2022. At the first stage, the company will acquire at least $1bn worth of its shares by the end of 2019. And the company’s investor friendly attitude has already brought
it benefits as despite having smaller reserves and lower oil production than its two bigger state-owned rivals – Gazprom Neft and Rosneft – Lukoil has been playing kiss chase with the title of “Russia’s most valuable company”
in recent months briefly overtaking the other two to top the list.
Russia’s biggest oil company also launched an IR charm offensive earlier
this year that included reducing its debt and its first ever $2bn share buyback. But Rosneft being Rosneft it has managed to stamp on a few toes in the process. The company launched the buyback in August that will last until December 2020, but then announced
it would only buy shares at the prices prevailing in May, significantly lower than in August. Then in September the company started getting cold feet and the whole programme is in limbo now.
management team has been put in place, which has started the process of repairing the damage – including buying back some stock to support the share price.
In July shareholders of Mobile TeleSys- tems (MTS) also approved a buyback of mobile major's shares worth RUB30bn ($0.5bn) over the next two years, which was met positively by the analysts. Here the motivation was slightly different as
“These days increasingly owners see their shares as a source of capital”
Rosneft CEO Igor Sechin complains the value of the company, which is on the US sanctions list (as is Sechin personally), should be closer to $130bn instead of its current market capitalisation of $65bn.
Also in September Russia’s leading supermarket chain Magnit launched a RUB16.5bn ($241mn) share buyback
to try and apply some salve to its long standing and loyal shareholders that have been burned in this year’s drama surrounding the company. For many years Magnit was an investor’s darling on the basis of its spectacular growth and the no-nonsense management who had built a world class retailer. How- ever, this summer Magnit’s founder and largest shareholder Sergey Galitsky sold 29% of his stake for RUB139bn ($2.4bn) to state-owned bank VTB
on February 16. Minority sharehold- ers were more than a little miffed as the size of the sale was just under the threshold that would have triggered an offer to minorities and the subsequent reports of board room battles over strategy all contributed to a tumble in the share price and a nasty tarnishing of the previously spotless reputation. In the last months a new highly respected
MTS is partly owned by AFK Sistema, which found itself in an epic corporate war with Rosneft. Rosneft accused Sistema of stripping its oil subsidiary Bashneft of cash before it was nation- alised and sold to Rosneft. The state- owned juggernaut got a court of freeze all of Sistema’s shares in subsidiaries, including MTS, that were to be contrib- uted to a huge compensation claim. Part of MTS share buyback is designed to insulate it from Sistema-related risks.
Russia’s internet giant Yandex announced a $100mn share buyback in June that is part of a staff motivation options programme. This sort of scheme is still extremely novel in Russia as while the top management are regularly included in shareholder structure, the US model of giving even low level employees options in the company is still almost unheard of in Russia. But then Yandex is arguably Russia’s most progressive company and already equal to its western peers – Yandex is already the most valuable internet company in Europe and one of the few Russian stocks to have regained and seen its shares pass its pre-2014 crisis IPO price.
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