UPDATE 2-Ukraine overshadows market debut of Russia's Lenta

Fri Feb 28, 2014 11:18am EST

* IPO priced at low end of range, shares down

* Will net around $480 mln for buyout giant TPG

By Megan Davies and Olga Popova

MOSCOW, Feb 28 (Reuters) - Russian hypermarket chain Lenta's stock market debut was clouded by political turmoil in Ukraine on Friday as investors reined in their exposure to Russian companies.

The negative sentiment pushed Lenta shares below their price in its initial public offering, which netted around $1 billion for shareholders including U.S. private equity firm TPG .

Ukrainian President Viktor Yanukovich was driven from power last weekend after upheaval sparked by his decision to spurn deals with the European Union and improve ties with Russia.

Around $2.5 billion has been pulled from Russian equities this year, partly due to the political upheaval in Kiev, analysts at VTB Capital said in a research note.

"Ukraine is getting scary and (investors) want to get out of Russia," said one Moscow-based trader, who said the events in Ukraine had no direct link to Lenta's business.

Lenta is among a number of retailers tapping into demand from foreign investors for consumer-oriented businesses in Russia, even as the country's economy slows.

Other consumer-focused IPOs are expected, such as children's goods retailer Detsky Mir, owned by oil-to-telecoms conglomerate Sistema, corporate and individual loans bank Credit Bank of Moscow and German retailer Metro AG's Russian cash-and-carry business.

Lenta said the total size of the offering was $952 million, or $1.1 billion if an over-allotment option is exercised in full. It will give the company a market value of $4.3 billion.

The company set a price of $10 per global depositary receipt (GDR), at the lower end of a range of $9.5-$11.5. One share is equivalent to five GDRs.

The GDRs started conditional trading in London at $9.70. Conditional trading occurs ahead of a company's official listing, when an IPO can still be pulled.

STRATEGY CLASH

The IPO represents a payday for U.S. private equity giant TPG, which has had a tumultuous time with its Lenta investment.

TPG, with Russian bank VTB, took stakes in Lenta in 2009 but disagreed over strategy with U.S.-born entrepreneur August Meyer, who owned 41 percent. That led to CEO Jan Dunning being ousted in favour of Meyer's nominee Sergei Yushenko.

TPG, VTB and another shareholder, the European Bank for Reconstruction and Development, refused to recognise the change.

In late 2010, Dunning, accompanied by armed guards, tried to enter Lenta's offices only to be stopped by Lenta's own security guards, according to witnesses at the time. Meyer later sold his stake to TPG and VTB and Dunning was reinstated.

The amount that TPG and VTB invested in Lenta has not been disclosed, but a banking source told Reuters in 2009 that they bought a 35.4 percent stake for $115 million. That would have valued the whole company at around $325 million - meaning it has grown in value by 12 times since the original investment.

TPG, which has since built its stake to 49.8 percent, was selling shares worth around $480 million in the IPO to cut its holding back to around 39 percent.

VTB, which owns 11.7 percent, is selling shares worth around $115 million and the EBRD, with 21.5 percent, is offloading stock worth around $205 million.

CONSUMER RUSH

Foreign investors have been keen buyers of consumer-oriented businesses in Russia, such as telecoms firm Megafon which went public in 2012 and Russian consumer credit company TCS which floated last year.

While Russia's economy is flagging - growth slowed from an average 7 percent a year to just over 1 percent last year and some of Lenta's rivals have seen their expansion start to slow - consumption is expected to hold up, analysts at Citi say.

Lenta's IPO price implies a 2013 estimated price/earnings ratio of 19.4 times - a discount of 17 percent to Magnit's GDRs, said Bank of America analysts.

Founded 20 years ago in Russia's second city of St Petersburg, the company operates 77 hypermarkets in 45 cities across Russia and 10 supermarkets in and around Moscow. It reported a 38 percent rise in net profit last year to 7.1 billion roubles ($202 million).

The banks advising on the IPO are JP Morgan Chase & Co , Credit Suisse, UBS, Deutsche Bank and VTB Capital. TPG Capital is acting as a co-manager while Rothschild is financial adviser to Lenta.

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