Yesterday (2 Feb) Prime Minister Vladimir Putin ordered VTB to consider a buyback of minority shareholders, with the bank required to present a plan on Monday (6 Feb). We believe this development could be positive in the short term but it is likely to have a deeply negative underlying effect on the investment case of VTB and all Russian state-owned companies. We reiterate our negative view on VTB.
Recap. Speaking at a conference on Thursday, Putin said a buyback should be concluded so that VTB’s “minority shareholders would suffer no losses”. He added that the state was ready to finance the buyback. Putin’s use of the words “no losses” may imply a buyback at the IP O price (RUB0.136/local share, 86% above the current market price). In this case, the entire free float of 25% would likely cost a prohibitive $12bn, too high, in our view, for both the bank and the state. VTB’s CEO Andrei Kostin promptly replied that the buyback would require RUB15-18bn ($0.5-0.6bn). This implies a partial buyback that we believe could be focused on local retail investors (about 100,000 people).
A positive effect? Only short term. No details on the potential buyback are currently available. We do not expect a full free-float buyback (which would actually represent the absolute best case for current shareholders, in our view) and believe that it might be aimed solely at local retail investors who bought shares in 2007, which raises further questions. The current positive effect on the share price is likely to be short-lived and we would recommend selling into strength. However, we would not advise an outright short since there is too much uncertainty over the details of the potential buyback. Abnormally high trading volumes in the stock over the past two weeks only highlight the risk, in our view.
Longer-term effect: is the government acknowledging VTB’s failure? By targeting a buyback, the state is effectively revealing its misgivings with respect to VTB’s public story. In particular, the main shareholder seems to doubt the prospect for VTB’s ‘Road to 15’ strategy which targets a local share price of RUB0.15 by 2013. This lack of confidence is very clear, in our view. A buyback does not support privatisation in any way and leaves us wondering if the overall government strategy is ultimately a ‘road to nowhere’. Over the years we have seen considerable evidence supporting the view that VTB is more a state vehicle than a profit-oriented (or shareholder-oriented) business and the government now seems to be acknowledging this, albeit indirectly.
Who needs corporate governance? Opting for a buyback at the IPO price to satisfy unhappy minorities suggests a moral hazard: why was it chosen over an economically driven decision such as demanding shareholder value from management? In our view, that the buyback has essentially been ordered by the prime minister suggests serious flaws in VTB’s corporate governance structure. The board, major shareholders, minorities and even the bank’s controlling institution (the state) seem to have no say in the matter: the PM and the bank’s CEO appear to be calling the shots. This raises deep fundamental questions about VTB’s corporate governance.
Will the buyback even occur? Ironically, we see a risk that the buyback might not take place. Preparations involve lengthy operational and legal procedures and once everything is ready the presidential elections will likely have passed. If the buyback is indeed being offered as a populist diversion (in the absence of economic reasons), there would then be little sense in carrying it out.
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