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By John Helmer, Moscow

If QIWI, the Russian electronic payments operator, is such a good thing, why did the market cut the stock price the minute QIWI announced this week that it’s planning to sell off more of the control shareholders’ shares?

QIWI was co-founded by Alisher Usmanov’s internet portal company, Mail.ru, and Usmanov continues to be one of QIWI’s biggest clients and sources of cashflow. In May, QIWI launched an initial public offering (IPO) of 12.5 million shares on the US Nasdaq exchange. Usmanov was the biggest seller at the time. Through Mail.ru, he started with 21.4% of the issued share capital, and ended up with 19.4% of the voting shares. He was followed by Andrei Romanenko, QIWI’s board chairman and one of the co-founders, who started with 12.7%, and ended with 8.6%. For the May 3, 2013, prospectus, read this.

The IPO listing price of the share was then about $16. In the five months until the new share sale notice appeared on September 18, the share price has risen to a peak of $34.33 (August 27); on September 17, it was $34.05. Current market capitalization is about $1.8 billion.

As payment operators go, QIWI is on the small side. Moneygram has a market cap of $1.1 billion; Euronet Worldwide, $1.9 billion; Global Payments, $3.8 billion; Western Union, $10.4 billion; Visa, $125.6 billion. QIWI’s operating market is also restricted to Russia and the Commonwealth of Independent states. “We”, QIWI says in its new prospectus, dated September 17, “have deployed over 14 million virtual wallets, over 169,000 kiosks and terminals, and enabled merchants to accept over RUB 44 billion [$1.4 billion] cash and electronic payments monthly from over 60 million consumers using our network at least once a month. Our consumers can use cash, stored value and other electronic payment methods to order and pay for goods and services across physical or online environments interchangeably.”

QIWI’s chairman Romanenko, chief executive Sergei Solonin, chief financial officer Alexander Karavaev, board directors Andrei Muravyev, Boris Kim, Igor Mikhailov, and others in their group currently control 59.5% of QIWI’s voting shares through front companies inventively named – Antana (British Virgin Islands), Saldivar (Cyprus), Dargle (BVI), Bralvo (BVI), Palmway (BVI), and E1 (Cyprus). In their notice to the US Securities and Exchange Commission this week, the Russian group said they are selling 2.7 million of the shares to be offered in this second IPO, managed by Credit Suisse. The biggest of the Russian sellers are Muravyev (1 million), followed by Romanenko (891,122).

Usmanov is selling 2.4 million; he will start with 19.6% of the voting shares, and end up with 17.3%. Mitsui & Co is selling the largest bloc, 3.5 million shares, and will go from a bloc of 14.4% of the voting shares to 5.5%.

The management group will end up after the IPO with a bigger control stake than they had before – 67%. Solonin remains the dominant stakeholder with 40.5%.

The bad news is that this sell-off is what is known as taking cash off the table — the control shareholders are passing risk to the market in return for between $270 million and $315 million in folding money. The good news is that this is being managed in such a way as to leave the Russian control shareholders in near-total power over what happens next to QIWI. The new public shareholders will enjoy almost no power over management, and just 6.7% of the votes at shareholder meetings.

qiwi_showIn short, this IPO is the sale of a subscription to a ringside seat at a circus, with the possibility of reselling the seat at profit later on — but no influence over the performance.

The good news is good from the point of view that if powerful Russian state entties like Sberbank or Russia Post, or individuals like Mikhail Fridman, want to take a big piece out of QIWI’s action, Messrs Solonin, Kim, Romanenko, and Usmanov are still standing in the way.

The shareholding is constructed out of two classes of shares, Class A which gives 10 votes at shareholder meetings, and Class B which allows just one vote. Class A shares can be converted into Class B, but not the reverse. The shares for sale as American Depositary Shares are Class B. So it turns out that what is for sale isn’t really any power at all over the company’s affairs. This design indicates how fearful the control shareholders are of a commercial takeover in the marketplace. Who would want to attempt that?

As businesses go, cash transfers are a highly competitive line, and for the time being QIWI is dependent for 19% of its revenue on three of Russia’s mobile telephone companies. One of them, Megafon, belongs to Usmanov. The other two are Vimpelcom, owned by Mikhail Fridman’s Alfa group; and MTS owned by the Sistema group of Vladimir Yevtushenkov. If Fridman wanted, he could prod Vimpelcom’s (Beeline) subscribers to send their payments through Fridman’s bank Alfa. “The Big Three, the prospectus admits, “may seek to reduce costs by decreasing their dependence on us as a payment acceptance channel and to drive their consumers to other channels.”

This may already be happening as the proportion of QIWI’s revenue in the first half of this year which comes from these three telephone companies has dropped to 10%. QIWI explains that the telephone companies, along with other merchant clients, are forcing down the size of the service commission which QIWI can take from the payment processing. “We have experienced a decline in our average net revenue yield primarily due to a decline in merchant fees from our larger retail merchants, in particular the Big Three MNOs.” Dividing net revenue by payment volume to arrive at the “net revenue yield”, this number has gone from 0.69% in 2010 for QIWI’s distribution business to 0.61% in 2012 – that’s a squeeze of 12%. In QIWI’s Wallet division the yield number has contracted from 1.11% to 0.82%, a squeeze of 23%.

The Wallet – now called Visa QIWI Wallet – is a banking operation described in the prospectus as “internet-based digital accounts that enable end-customers and merchants to store funds, transact with third parties and transfer money online.” The Wallet payment market in Russia amounts to about Rb163 billion ($5.3 billion) as of 2011. That year QIWI appears to have had two-thirds of the market. QIWI’s competitors are YandexMoney and WebMoney. The former is now owned by Sberbank; the latter is owned by WM Transfer Ltd, which conceals its principal control shareholder, an ex-military officer, behind a Belize registration. In 2009 WM Transfer ran into trouble with the German financial regulator, BaFin. This year the trouble got worse in Ukraine.

The Russian banks are potentially powerful competitors, QIWI acknowledges. “Our primary competitors include Sberbank, Russia’s largest retail bank that is majority-owned by the Russian state, and Alfa-Bank, one of the leading privately owned Russian retail banks, both of which have electronic banking systems and large retail networks. Some retail banks are currently developing their own networks of kiosks and terminals and various electronic payment products. Sberbank, for example, has stated that its strategic goals include the promotion of alternative banking channels, such as kiosks, internet banking and mobile banking, and has recently acquired a majority stake in Yandex.Money, a major electronic payment system operator in Russia, to further develop its online payment services capabilities. Sberbank has access to significant financial resources and an extensive nationwide network of branches that can serve as a platform for the expansion of its kiosk business. Sberbank is the largest processor of utility bill payments, which constitute a very significant portion of overall consumer spending in our industry. These factors may give Sberbank a substantial competitive advantage over us if it pursues its strategy of establishing a broad kiosk network, internet banking and mobile banking businesses.”

At the heart of QIWI’s money-moving business, the QIWI Bank is particularly vulnerable to attack from state regulators. “July 2013, the CBR [Central Bank of Russia] completed an inspection of Qiwi Bank and discovered a number of deficiencies in its compliance with certain banking regulations in relation to, among other things, the mechanics of its settlements with OSMP as a payment agent (see “Regulation – Regulation of Payment Services – Qiwi Distribution”), reporting requirements, credit risk assessment, prudential ratio calculation and reserve requirements and governance. The CBR also noted that Qiwi Bank’s internal controls did not reflect the nature and scope of the bank’s activities.”

These oughtn’t to be surprising Russian-type risks, at least not for experienced Russian investors. So the best sensitivity test is whether the Russian control stakeholders are staying or fleeing. The prospectus evidence is that they are doing both.

As for the risk of being tied to Usmanov, the prospectus warns that he may turn against Solonin et al. and drive them out of QIWI at less than their shares are currently worth. “Mail.ru and Mitsui make investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us…Mail.ru operates an electronic payment business, Money@Mail.ru, a direct competitor of Visa Qiwi Wallet, which may result in them being provided with business opportunities instead of us…the interests of these shareholders and our directors associated with them may conflict with our interests, and they may compete with us, pursue opportunities instead of us, or focus more on other businesses rather than on ours for which we have no recourse. Such actions on their part could have a material adverse effect on our business, financial condition and results of operations.”

The rules of a takeover, the prospectus warns, are those of Cyprus, where QIWI is registered, not in the US where its shares are traded. “As of the date of this prospectus, Cypriot law does not contain any requirement for a mandatory offer to be made by a person acquiring shares or depositary receipts of a Cypriot company even if such an acquisition confers on such person control over us if neither such company’s shares nor depositary receipts are listed on a regulated market in the European Economic Area… a bid for, or creeping acquisition of control over, us is currently not regulated by Cyprus law.”

So a Russian squeeze-out of the control shareholders could be effected on terms the minority free-floating shareholders may suffer from – and be obliged to suffer in silence.

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