Grocery's Offering Draws Investors

Investors hungry for exposure to Russia's consumer boom will snap up shares on Friday in the country's first-ever public offering in the retail food industry at leading supermarket chain Sedmoi Kontinent, analysts said.

Moscow's first post-Soviet food store chain, established in 1994, will offer 8,415,573 ordinary shares with a face value of 0.5 rubles on the RTS exchange through an open subscription on Friday.

Analysts expect the offer to be heavily oversubscribed, as investors seek a slice of the action in Sedmoi Kontinent stores thronged with food-shopping upscale Muscovites.

"Investors have long been wanting exposure to the Russian consumer sector but there is little on offer," said Renaissance Capital analyst Natalya Zagvozdina.

The retail food industry is booming, with sales growing by 30 percent per year. Supermarkets' shares in food sales has exploded from almost zero five years ago.

The economy is growing on the back of high prices for oil, putting new cash into many Russians' pockets. A mini-crisis in the banking sector this summer has also prompted individuals to spend rather than save.

In Moscow, Zagvozdina estimated supermarkets now account for 16 percent of all retail food sales, up from less than 5 percent three years ago.

Sedmoi Kontinent, one of the country's largest supermarket chains with 58 stores, reported first-half revenues of $226.5 million and 2003 revenues of $343 million under international accounting standards.

According to the company's prospectus, some 33 million clients visited Sedmoi Kontinent stores in the first half of 2004 -- if they all made a purchase, that would mean an average check at the till of 200 rubles or just over $7.

UralSib financial corporation analyst Marat Ibragimov said U.S. investors will be especially interested in the offer as retail stocks are more popular in the United States than in Europe.

The only other significant domestic retail listing, pharmacy chain 36.6, floated last year, only rarely trades.

Investors' hunger for exposure to the Russian consumer sector was highlighted by October's placement of Turkey's Efes Breweries International, which sells 60 percent of its beer in Russia. The sale was five? times oversubscribed and the stock rose 20 percent after the placement.

Sedmoi Kontinent has set the pre-emptive share price for existing stockholders at 265 rubles ($9.10). Under Russian legislation, the placement price must not be more than 11.1 percent higher than the price offered to existing shareholders.

This puts the value of the grocer's IPO at $80 million. This is miniscule by international standards, but for a local market dominated by oil stocks, it is very welcome among investors.

Ibragimov said the sale would pave the way for other retailers planning IPOs. Russia's largest food store, discounter Pyatyorochka, has plans to place shares in London and second-largest grocery chain Perekryostok is mulling an IPO in 2006.

"The Sedmoi Kontinent [IPO] will set a sort of benchmark for all of them," Ibragimov said.

He said the sector was due for a big overhaul with an influx of foreign companies likely to squeeze out poorer local players.

"This is what has happened in Eastern Europe and there are practically no local retailers left there," Ibragimov said.

Germany's Metro, Finland's Stockmann and France's Auchan have operations in Russia.

So far local retailers have managed to fend off the foreign competition, although local retail is very expensive as the lack of good trading space is forcing many stores to build their own outlets or rent them at a high price.