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Russia IT Company IBS Weighs Spinoff Via U.S. Share Sale

November 29, 2012

IBS Group Holding Ltd. (IBSG), a Russian provider of information-technology services, is considering a spinoff of its software development unit Luxoft via an initial public offering in the U.S.

IBS Group weighed plans for a Luxoft IPO earlier this year to unlock value for investors and decided to delay an offer because of market conditions, President Anatoly Karachinsky said in an interview in his Moscow office. He co-founded Frankfurt- traded IBS and is also a shareholder.

“We are strongly undervalued by the market as our company combines two investment cases, which are interesting for different investors,” Karachinsky said. “One is IT business in Russia, and the other one is the so-called offshore software development for large Western companies, under the Luxoft brand.”

The idea of a Luxoft IPO was inspired by the example of Epam Systems Inc. (EPAM:US), a company with roots in the Commonwealth of Independent States that sold shares in New York in February and whose shares have since gained 68 percent to value the company at $875 million. “It became easier for us to target the U.S. stock market once we’ve got a distinct peer from central Europe there,” Karachinsky said.

Russia IPOs

Epam trades at about twice its forecast 2012 sales, which means Luxoft may be worth as much as $600 million in an IPO, implying this multiple, said Alexander Vengranovich, an analyst at Otkritie Capital.

“Previously, the U.S. got used to offshore programmers from India, with companies such as Infosys (INFY:US) and China,” Karachinsky said. “Now, they’ve come to know programmers from central Europe, including Russia. With the Epam share sale, it’s clear what multiples we could hope for in the U.S.”

Russian IPOs have struggled this year. Promsvyazbank scrapped a share sale of as much as $414 million last month as the offered price didn’t satisfy current shareholders. OAO MegaFon (MFON), Russia’s second-largest mobile-phone operator, barely covered an IPO at the bottom of its price range, raising $1.7 billion this week. Sberbank has dropped about 5 percent since a September secondary offering.

Russia, which gets about half of its revenue from energy sales, has the cheapest stocks of the so-called BRIC nations that also include Brazil, India and China, as crude has fallen 12 percent in 2012, data compiled by Bloomberg shows.

Russia Growth

Luxoft’s offerings include bespoke software designs, including for entertainment systems in Ford Motor Co. (F:US)’s cars and client-relations management products for Deutsche Bank AG. Revenue from this business rose 13 percent in the six months ending Sept. 30 to $145 million, the company said in a report today.

IBS’s sales from its IT services business in Russia gained 1.8 percent in dollar terms to $201 million. The profitability of this part of the business is lower as the offerings are more standardized, based on products from SAP AG (SAP) and Oracle Corp. (ORCL:US), Karachinsky said without disclosing profit margins.

The Russian information-technologies market is set to reach $34 billion this year including $6.8 billion from IT services, according to IBS, citing data from IDC. IBS plans to increase Russia IT services sales 6 percent to 10 percent, in line with the market, Karachinsky said.

The market in Russia is poised to grow as only 5 percent of large companies in the country have complete, fully functional technology systems for enterprise resource planning, Karachinsky said.

Oracle, which had a “negligible” market share in Russia five years ago is expanding in the country at the expense of SAP, Karachinsky said. The Redwood City, California-based company is growing faster as it shares contracts with local partners, while SAP carries out some projects in the country on its own, without Russian partners, he said.

IBS Group shares have risen 7.2 percent in Frankfurt to 16.30 euros this year through yesterday, giving the company a market value of 360 million euros ($466 million).

To contact the reporter on this story: Ilya Khrennikov in Moscow at

To contact the editor responsible for this story: Kenneth Wong at

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