By John Helmer, Moscow
You could pack your bathing togs, sunglasses and sailing cap, and thus attired pay a call at 24 De Castro Street, in Tortola, British Virgin Islands, to drop your eighteen dollars off personally. This would be more fun than calling your stockbroker to put the money on buying a share in Luxoft in its initial public offering (IPO) on the New York Stock Exchange this week. The BVI address is where Luxoft, a Russian computer programmer and software developer, is registered. The sailing weather is milder than the Isle of Man, in the English Channel, where Luxoft’s controlling shareholder, the IBS group, is based.
IBS and Luxoft are hoping to collect as much as $84 million on the share punt. Punt is the word for the IPO, which beats all previous Russian IPOs in leaving the control shareholders and Russia’s state bank VTB with 98.5% of the voting shares of the newly listed company. The tiny 1.5% of voting shares being sold for $84 million also come with the proviso that the payoff for the control shareholders is entirely up front. This, the prospectus explains, is because no future dividend will be paid to the new shareholders. The only gain they can bet on is capital gain on the share price. But that depends on Anatoly Karachinsky (image right), the control shareholder behind both Luxoft and IBS, earning a future profit which he doesn’t plan to share.
According to Uralsib Bank, the only Moscow institution to have published its analysis of the Luxoft IPO so far, the offer pricing for Luxoft is a little less than a methodical valuation of Luxoft’s financial performance would warrant. Still, as punting goes, Uralsib recommends it at the bottom of the offer range. “We recommend participation at $16-17/share. The proposed price range represents a 5-16% discount to our fair valuation for the company of $19/share (following the split) or $585 mln pre-money, implying a 2013E EV/EBITDA of 8.6. We thus recommend participating in the IPO at the lower-middle end of the price range (i.e. $16-17/share), which would represent at least a 10% discount to our valuation.”
In details for the share sale issued  yesterday at the US Securities and Exchange Commission, IBS is proposing to sell 2.05 million of its shares in Luxoft for what they will fetch in the market. The underwriters – UBS, Credit Suisse, JP Morgan, VTB, and Cowen & Co — have proposed a range of $16 to $18 per share. So if there are buyers, IBS will gross between $32 million and $37 million. Another 2.05 million shares are being sold by Luxoft itself, so it is hoping for the same spread. The underwriters have the option to acquire for resale another 613,000 shares.
The newly released numbers invite the New York market to put a value on Luxoft of between $522.2 million and $587.5 million. The current market capitalization of IBS, whose shares trade on the Frankfurt Stock Exchange, is €402 million ($539 million). The deal for New York sharebuyers is thus aimed at doubling IBS’s money.
Exactly what business Luxoft and IBS do to deserve this was spelled out on Monday here . In the financial year to March 31, Luxoft reports sales of $315 million, cash costs of $186 million, and net income of $38 million. Uralsib Bank analyst Konstantin Belov estimates that for the current financial year, Luxoft will have sales of $390 million; costs of $321 million; and net income of $52 million. With earnings (Ebitda) estimated for FY 2013 at $69 million, a share price of $18 would generate a price to earnings ratio (P/E) of 11.7. According to Belov, none of Luxoft’s peers in the global market for its line of business is valued so poorly.
Compared to the US-listed peer EPAM – the creation of American residents of Belarus origin which first sold its shares on the NYSE a year ago — Luxoft shares are worth 21% less, according to the Uralsib report.
In EPAM’s case, the control shareholders retained 60% after the IPO; VTB kept 6.4%. These shares were all of one class, carrying one vote per share . In Luxoft’s proposed share listing, there are two classes of shares, Class A and Class B. But only the former are for sale, while the latter exercise 10 votes per share. In effect, this leaves the Karachinsky group with 88.5% of the voting shares after the IPO. VTB, which is also part of the control shareholding, hangs on to 10%.
LUXOFT’S SHAREHOLDER CONTROL BEFORE AND AFTER THE IPO
Take a magnifying glass and look carefully at this tabulation. Click on the tabulation to enlarge and look carefully. At the top of the table there are asterisks and daggers to indicate footnotes at the bottom; the daggers are at the top of columns 5 and 11. At bottom, though, the footnote text explaining how so many votes are retained after the share sale is missing.
At its Moscow headquarters today Luxoft was asked: how does Mr Karachinsky justify the Class B voting share arrangement which will preserve control voting power in Luxoft of 98.5% of the post-IPO structure? He has not replied.