Shares in MegaFon fell 2 percent on their market debut on Wednesday, following a bumpy ride for the IPO and showing limited demand among investors for another Russian mobile issue.
Russia's second-biggest mobile phone operator had priced its London and Moscow offer at the bottom of a previously indicated range, raising $1.7 billion (1.0 billion pounds) and pitting itself against New York-listed Russian market players MTS and Vimpelcom .
Yet the muted response to MegaFon, controlled by Russia's richest man Alisher Usmanov, showed investor caution about backing a Russian issue - some of which have a history of performing poorly - and a reluctance to back MegaFon over leader MTS which has a bigger free float and similar dividend yield.
"MegaFon is five years late with its IPO as the phase of active growth of the Russian telecoms market is already over," said Yevgeny Golosnoy, analyst at brokerage Metropol. "Global investors are cautious because they need either a very low price or growth potential."
MegaFon's IPO at $20 (12.51 pounds) per GDR - the bottom of an indicated range between $20 and $25 - values the company at $11.1 billion and is the biggest listing by a Russian company since aluminium producer RUSAL <0486.HK> floated in Hong Kong in 2010.
Leaving the London Stock Exchange after a ceremony to mark the start of trading, 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 below their issue price, Megafon 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 had been 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," or quickly trade out of a stock, said one equity salesman in Moscow. A separate source said demand had increased towards the end of the roadshow when U.S. investors returned from the Thanksgiving holiday.
PRICED AT A DISCOUNT
MegaFon is focused on Russia and is outpacing its peers in a maturing, though still lucrative, mobile market. Still, analysts have said the IPO would only be interesting if priced at a discount to MTS.
Alexander Vengranovich, analyst at Otkritie, said the offer price valued MegaFon at a discount of around 12 percent to MTS and gave 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 at less than the implied value of between $17 billion and $20 billion under that deal.
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 assuming exercise of the over-allotment option.
MegaFon's muted trading follows a history of poor performance by Russian IPOs, the majority of which 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 to the issue, with Citigroup Inc , Credit Suisse and VTB as joint bookrunners.
(Additional reporting by Douglas Busvine, with Alessandra Prentice in London; Editing by David Holmes)