Issue 5, 2011. October-November



More Georgian companies list on International exchanges

Andrew Coxshall, KPMG

The electricity distribution line one of the assets slated for a possible IPO.

In August 2011, the Prime Minister of Georgia announced that Georgian Railways (GR) along with Georgian Oil and Gas Company (GOGC), Georgian State Electro Systems (GSES) and Telasi would be seeking to list shares in International markets (London and Warsaw were mentioned by the PM). Also Bank of Georgia announced that it would be seeking a "Premium" listing on the London Stock Exchange (LSE) - a move that should increase the liquidity of securities and broaden the investor base. There is also speculation that another Georgian bank is looking to list.

Bank of Georgia became the first Georgian company to list its shares on an international exchange when, back in 2006, it was listed in London. However it has taken until now for other Georgian companies to follow suit. So why the increase in activity? What does it mean for Georgia and what could it mean for your business?

The road to London

Since May 2005, nearly 40 companies from the former Soviet Union have been listed on the LSE. Of these, over 30 are from Russia, 4 from Kazakhstan, 2 from Ukraine and, until now, only 1 from Georgia. The number of listings increased from only 4 in 2005, peaking at 12 in 2007 before dropping to zero in 2009. This is hardly surprising given the state of the global economy at that time.

2010 saw a slight revival with 4 listings and 2011 has already seen 11 listings. The listings/IPOs (Initial Public Offerings) have ranged from $160 million to over $10 billion. This year's clear general increase in activity may partly explain the PM's August 2011 statement.

The Prime Minister's announcement in August appeared to indicate a new phase in Georgian privatizations (GR, GOGC and GSES are all 100% owned by the Government of Georgia) but this time selling minority stakes on the international markets. So what is actually involved in a listing in, say, London?

What is a listing?

When a company wants to have an Initial Public Offering this normally means that it makes its shares available for purchase on a recognized stock exchange. As an alternative, the company can issue global depositary receipts (GDRs). A GDR represents an interest in a share but is not actually a share itself and listing GDRs is the most popular method for listings of companies based in the former Soviet Union. If a company wants to list in London, for example, the question also arises whether to list on the main market, the "Official list" or on the Alternative Investment Market (also known as AIM). Generally listings on AIM are for smaller companies and AIM is perceived as a market for developing companies with higher risk.

"I own a big Georgian company; can I just list in London?"

Firstly, it should be noted that listing shares or GDRs in London is not an easy or quick process; it requires a huge amount of effort by the management of a company and a great deal of time. Also it can be a very costly exercise - international bankers, who act as underwriters, Reporting Accountants and two sets of lawyers are expensive. Due to the amount of time, effort and expense involved in a listing it does not really make much sense to try and raise small amounts from the international markets - $50 million is about the minimum. So only the very largest Georgian companies should contemplate this route.

Another very important issue to consider before thinking about an international listing is that markets (and the relevant listing authorities) will generally require the company to "comply or explain" adherence to the relevant standards and benchmarks in the applicable jurisdiction. For example, for a listing in London the company would need to take into account the Corporate Governance Framework in the UK (such as the Turnbull report, the UK Corporate Governance Code, the UK Companies Act, etc.).

For a few companies this may be straight-forward but for most companies unused to public scrutiny it will involve a large amount of work to put the necessary policies and procedures in place and to find the right people (for example to be Independent Directors, head up a proper internal audit department and to head up an Investor relations department).

Why go for a listing?

At this point you might be asking if going for a listing is so expensive, time-consuming and difficult, why bother? It is a good question which is not simple to answer. It really depends on what the management or shareholders are seeking.

If shareholders are looking to unlock their investment but still maintain control and the company is already well-run, has good financial reporting systems and good corporate governance (audit committee, nomination committee, independent directors, etc.) then the process could be easier than trying to find a private investor to acquire a minority share in the business.

Also for a company to state that it is listed on an international stock exchange, carries a certain amount of kudos. Svetlana Marriott, a Capital Markets Partner for KPMG in the CIS, currently on secondment from KPMG in London where she spent 8 years working for KPMG explained, "Listing on an international exchange can hold many benefits for companies including relatively cheaper financing (compared to debt financing), a way for shareholders to extract value and also cheaper financing in the future, as listed companies can generally obtain finance at better rates than unlisted companies."

What to do next

So if you believe that your company might be ready for a listing what do you need to do? Firstly, you need some good advice from professionals who know what is involved in the process. Your auditors should generally know what is required. The company will need to appoint underwriters, bankers, lawyers, accountants, specialists depending on your business and internal committees (audit, nomination, remuneration) and be ready for a great deal of work.

What to expect

Lastly, be prepared for lots and lots of discussions with lawyers (your lawyers, the advisor's lawyers, local lawyers, international lawyers) and be ready for some strange terms such as "greenshoe", the "red herring", "lock-up" and "book-runners".

End of the journey

The expected increase in listings of Georgian companies will mean that Georgia becomes known to a wider circle of investors and therefore could help promote further direct investment into Georgia. In addition, by making Georgian companies adhere to international best practice the general level of corporate governance should also improve which should lead to better run, more efficient and more profitable Georgian companies. However the journey is not a short one, nor is it easy, but it can ultimately be rewarding for those willing to take the road to London, or Warsaw, or New York, Hong Kong or Singapore ...