Russia's second-biggest mobile phone operator MegaFon fell 2 percent in its market debut following a bumpy ride for its IPO, showing investors had limited demand for another Russian mobile stock.
Controlled by Russia's richest man Alisher Usmanov, MegaFon priced its London and Moscow offer at the bottom of a guided range, raising $1.7 billion and pitting itself against New York-listed Russia market players MTS and Vimpelcom .
The muted response showed investor caution about backing a Russian issue - which have a history of performing poorly - and a reluctance to back MegaFon over MTS which has a track record.
"MegaFon is five years late with its IPO as the phase of an active growth of the Russian telecoms market is already over," said Yevgeny Golosnoy, analyst at Metropol. "Global investors are cautious because they need either a very low price or growth potential."
MegaFon's IPO at $20 per GDR - the bottom of a $20-$25 share range - values it at $11.1 billion and is the biggest stock market listing by a Russian company since aluminium producer RUSAL <0486.HK> floated in Hong Kong in 2010.
Leaving the London Stock Exchange after ringing the opening bell, MegaFon chief executive Ivan Tavrin high-fived a colleague and appeared elated. He declined comment on the offering.
Following a line of Russian IPOs which are trading underwater, MegaFon's shares fell below their offer price and were trading at $19.58 at 1100 GMT.
The deal was oversubscribed on Monday evening, sources said, but it was a struggle to fill the book, one market source said.
"People got full allocations and hedge funds made up a significant portion of the book - that's a bad sign because they flip," said one equity salesman in Moscow. A separate source said demand increased towards the end of the roadshow when U.S. investors returned from the Thanksgiving holiday.
MegaFon is focused almost exclusively on Russia and is outpacing its peers in a maturing, though still lucrative, mobile market. Still, analysts have said that the IPO would only be interesting if priced at a discount to MTS.
Alexander Vengranovich, analyst at Otkritie, said the offer values MegaFon at a discount of around 12 percent to MTS and gives it an enterprise value/EBITDA multiple of 3.6 for 2013.
MegaFon's offering had a setback when questions about corporate governance prompted investment bank Goldman Sachs to drop out of the deal, a source previously said.
The UK Listing Authority signed off on the prospectus only after Usmanov pledged to keep overall control under a deal to restructure his and his partners' assets.
The IPO follows an April deal which saw Usmanov take control and allowed Nordic telecoms firm Teliasonera to sell down its stake and Russian billionaire Mikhail Fridman to cash out. Today's offering values MegaFon below that deal - which implied a value of $17 billion - $20 billion.
In the IPO, Teliasonera is selling down its 35.6 percent stake and will retain an interest of 25 percent plus one share on a fully diluted basis. MegaFon, which is selling treasury stock, will have a free float of nearly 17 percent if the 10 percent over-allotment is exercised.
Teliasonera will receive $1.3 billion (9 billion Swedish Krona) assuming exercise of the over-allotment option. TeliaSonera said its total investment in MegaFon has been 1.2 billion Swedish Krona ($180 million).
MegaFon's muted trading follows a history of poor performance by Russian IPOs. The vast majority of Russian IPOs from the past two years are underwater.
"In the past Russian IPOs have been priced fairly aggressively, particularly pre (the 2009) crisis, and then struggled, but since the crisis I think there is a lot more realism and pragmatism in the pricing," said Chris Weafer, strategist at Sberbank CIB.
Metropol's Golosnoy said he expects MegaFon's stock price to fall further, suggesting buying only at a price of $17-$18.
Morgan Stanley and Sberbank are acting as joint coordinators, with Citigroup Inc , Credit Suisse and VTB as joint bookrunners.
(Reporting by Megan Davies, Maria Kiselyova and Douglas Busvine; Additional reporting by Alessandra Prentice in London)