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| VTB’s $3.3 billion equity follow-on | |
| Joint global coordinators | Citi, VTB Capital |
| return to the Deals of the Year 2013 index | |
Despite the emergence of signs of recovery across the region, central and eastern Europe saw surprisingly little in the way of eye-catching deal flow in 2013. Activity in both M&A and equity capital markets remained subdued. The bond market feeding frenzy in the first half of the year produced some big transactions, but was short on innovation and complexity.
The same could not be said of VTB Bank’s $3.3 billion capital increase. More than six months in the making, the transaction – which amounted to 25% of the pre-offering share capital of Russia’s second-largest lender – presented a unique set of challenges for leads Citi and VTB Capital, and ultimately broke new ground by combining public and private elements in the largest-ever Moscow-only follow-on offering.
The deal’s success was by no means assured. In mid-2012, when the capital increase was first mooted, VTB’s share price had yet to recover from the battering it had received a year earlier when the group was forced to ask for a $14 billion state bailout to plug funding holes in its newly acquired subsidiary, Bank of Moscow.
Given the projected size of the offering, this heightened the risk that opting for a traditional bookbuild format might send VTB’s share price into a downward spiral as speculative investors shorted the stock in the expectation of being covered during allocations – a process that had resulted in the bank’s previous capital increase, in February 2011, pricing at an 18% discount to pre-announcement levels.
VTB’s management therefore decided to target a handful of cornerstone investors with a view to securing firm commitments for most of the deal before going public. “We realized that a capital raise of this size could offer a fairly unique opportunity to larger buyers,” says Herbert Moos, deputy president and chairman, chief financial officer at VTB.
The picture was complicated, however, by the fact that the Russian government, which at the time held 75.5% of VTB, had indicated that it would not participate in the capital raise. As this would result in a substantial dilution of the state’s shareholding, the deal counted for regulatory purposes as a privatization – which in turn meant that, under legislation due to be implemented at the start of 2013, any equity offering would be restricted to ordinary shares in the local market.
That limited the universe of potential investors, as did the need for interested parties to agree to be wall crossed during several months of discussions and due diligence. Sovereign wealth funds were therefore the natural target, and Qatar Holdings – which in October 2010 had paid $2.72 billion for 5% of Santander’s Brazilian operations – was the first point of call.
Qatar’s state fund committed itself early to the deal in size on the basis of its preferred format, a mandatory convertible bond issue. Strong interest from other SWFs, however, in particular Norway’s Norges Bank Investment Management (NBIM), enabled VTB to insist on an ordinary share issue and to generate price tension.
Indeed, by the time the bank went public with the deal on April 26, the effective discount had been fixed at just 6.8% to the previous day’s closing price on the back of commitments from four cornerstone investors – NBIM, Qatar Holdings, the State Oil Fund of the Republic of Azerbaijan (Sofaz) and China Construction Bank – and a further handful of institutional buyers from Brazil and Russia.
The announcement that the Russian government’s share of the deal was fully covered then created a virtuous circle, boosting VTB’s share price and increasing demand for the remainder of the offering from both existing shareholders – who exercised 57.3% of their pre-emptive rights – and new institutional investors.
Both private and public elements of the deal were thus oversubscribed, VTB’s management achieved its target of a single-digit price discount, and the bank’s tier 1 capital ratio was increased from 10.3% to a comfortable 11.9%.
For Ken Robins, EMEA head of equity capital markets at Citi, however, the most notable feature of the deal was the way it blurred the lines between public and private offerings – a format he expects to become more common, especially for large transactions, as investable capital is increasingly concentrated in the hands of a small pool of investors.
“There are obviously precedents for SWFs taking minority stakes in financial institutions, but this was the first time it had been combined with a public offering to take advantage of both types of investors,” he says.
Moos agrees. “I think this transaction will provide a useful template for other Russian banks and corporates with capital requirements,” he says.
