Bloomberg News

M.video Sells $365 Million of Shares in Russian IPO (Update4)

November 01, 2007

M.video (MVID), Russia's second-biggest electronics retailer, sold $365 million of shares in an initial public offering to fund openings of new stores as sales growth outstrips capacity.

Investors bought 52.5 million shares, or a stake of about 30 percent, for $6.95 apiece, the Moscow-based company said today in a statement. The retailer, Russia's second-largest electronics chain, had offered the shares in a range of $6.75 to $7.25.

M.video will get about $203 million of the IPO's proceeds, with the rest going to owners including majority stakeholder and co-founder Alexander Tynkovan. The retailer plans to use the funds to add outlets such as the three superstores it opened on Sept. 21 in the cities of Kursk, Perm and Nalchik. Consumer-electronics sales in Russia may rise about 15 percent annually through 2010, according to estimates by Renaissance Capital.

``They have a very strong management team and a strong quality brand, so they need to continue with their aggressive expansion plan,'' said James Beadle, who helps manage about $180 million at Pilgrim Asset Management in Moscow and placed an order for M.video shares. ``There is plenty of scope for any retail company to expand successfully in Russia.''

The shares rose as high as $7.24 on their Russian Trading System debut and closed 1.2 percent higher at $7.03. They were allotted to Russian investors and to institutional buyers who were mostly in the U.K. and continental Europe, according to a statement distributed on Business Wire.

`Key Milestone'

All the shares on offer in the IPO were sold by the company's owners, who used some of the money raised to purchase 30 million new shares at $6.75 apiece, M.video said.

``The flotation is a key milestone in our development and will allow us to invest further in the business and capitalize on the significant growth opportunities in the Russian consumer-electronics market,'' Tynkovan, also the company's president, said in the statement.

Russia's expanding economy is boosting per-capita incomes by more than a fifth a year, fueling spending on higher-quality goods, according to research by Renaissance, the investment bank that organized the IPO with Deutsche Bank AG.

The IPO price values M.video at 10.7 times its earnings before interest, taxes, depreciation and amortization, based on 2008 profit estimates compiled by Andrei Nikitin, an analyst at Uralsib Financial Corp. in Moscow.

That compares with 8.2 times for Best Buy Co. (BBY:US) of the U.S., the world's largest electronics retailer, according to 2008 estimates from UBS AG. DSG International Plc and Kesa Electricals Plc, Europe's second- and third-biggest electronics retailers, are valued at 5.4 and 5.1 times respectively, the UBS estimates show.

Digital Cameras

M.video's net income will almost double to $28 million this year as sales climb 49 percent to $1.99 billion, Renaissance estimates. Profit before interest, depreciation and amortization may rise by 0.8 percentage point to 5.2 percent of sales.

The 110-store M.video chain sells goods from digital cameras to washing machines and aims to expand its selling space by 12 percent to 328,682 square meters (3.5 million square feet) in 122 outlets by the end of this year.

``It's a very difficult sector, as you suffer from Internet competition,'' said Johan Ekstrom, who helps manage about $1 billion in assets at Alfa Capital in Moscow and didn't order the shares. ``Consumers can also go to other national players, and international players could come in. Still, there is a lot of growth opportunity in Russia.''

M.video plans to increase its share of the country's $13.2 billion consumer-electronics market to about a fifth from 13 percent at the end of June, Renaissance says.

Eldorado Group

Eldorado Group is Russia's biggest electronics retailer by sales, controlling 28 percent of the market last year with 1,472 stores, according to Renaissance.

As well as rising competition, M.video's profit growth may be curbed by increased rental and labor costs, Uralsib's Nikitin wrote in an Oct. 10 note. M.video leases most of its stores, and labor costs rose by 1.5 percentage points to 6.5 percent of sales in the first half, according to the note.

Tynkovan will keep a stake of more than 50 percent after the IPO, the company has said. The rest of the stock is owned by his brother Mikhail, a board member; General Director Pavel Breyev, both of whom co-founded the chain with Tynkovan in 1993; and Alexander Zayonts, also a board member.

To contact the reporter on this story: Maria Ermakova in Moscow at mermakova@bloomberg.net.

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net


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