Ericsson shareholders got the first inkling of a huge capital increase in the company’s half-year report. CEO Lars Ramqvist described an extensive restructuring, with an increased need for working capital, during a rapid growth phase. Moreover, new telecoms players need help with financing. Against this backdrop, Ramqvist proposed a capital increase, and shareholders voted in September to strengthen the balance sheet with a $1 bn rights issue to close in October – the biggest in Swedish history.
By accompanying its announcement with detailed restructuring plans followed by positive earnings news, Ericsson ensured a warm response from investors. Despite the capital increase, the telecom group’s plans inspired a bull run and all time price highs on the Stockholm exchange and on Nasdaq, where Ericsson’s ADR is one of the biggest foreign listings. In fact, more than half of Ericsson’s shareholders hold ADRs, which Tom Crane, manager of Citibank’s corporate actions department, calls ‘unique among corporations’.
The Citibank sponsored Ericsson ADR has been one of the depositary’s flagship programmes since 1990. Crane explains that for every ADR owned, one ADR right is granted, and it takes ten ADR rights to subscribe for one new ADR. Investors can pay in Swedish kroner, or in US dollars at 105 per cent of the Swedish kroner price to account for forex fluctuation.
Lead managers Enskilda Corporate, Svenska Handelsbanken and Morgan Stanley priced the one-for-10 rights issue at Skr90 ($12) per share – around 40 per cent lower than the price of Ericsson’s common stock. With such a generous discount, take-up has been keen. Ericsson has two classes of shares listed in Stockholm – ‘A’ shares which carry one vote each, and ‘B’ shares/ADSs carrying 0.001 vote each. There is a maximum subscription of 7.46 mn ‘A’ shares and 79.5 mn ‘B’ shares/ADSs.
Industry analysts see much of Ericsson’s new capital going towards innovative vendor financing of new players in the emerging US personal communications services (PCS) market. ‘There are simply not enough investors in the US to cover PCS financing needs,’ says Philip Wacker of Ericsson. Aside from vendor financing, Ericsson is helping PCS companies explore other avenues of financing. It has an agreement with Citicorp and other banks to organise banking, and it is on the look-out for venture capitalists.
Russian Receipts
Some 14,000 new public companies sprung onto the market two years ago in Russia’s mass privatisation. The ride since then has been rocky for stock issuers and investors. Whole sectors of the economy were under siege as managers came to grips with controlling their own destiny. Still, raising capital in Moscow seems to be one part number crunching and two parts luck. Long- term bank financing comes at such a high cost that loans don’t make sense. And the absence of strong market mechanisms has made it difficult to issue equity or bonds.
Hope for Russian enterprise came recently from the SEC, however. In a move once unthinkable, the SEC announced it was willing to accept applications from Russian companies, clearing the way for the largest enterprises to seek foreign financing. About a dozen leading Russian companies are considering issuing ADRs.
According to Mark Bach, Citibank’s global sales director for DRs, Citibank has a strong presence in Russia. The bank has a number of mandates from Russian companies to establish ADRs. One of those clients has already been awarded one of two 12G exemptions for a Russian company by the SEC, clearing the way for a level 1 ADR. Beyond that, no filing has been done. Still, Bach is cautious: ‘There has been a lot of press on Russia going back to last year, but much has yet to materialise.’
Still, one of Russia’s biggest investment banks says some 50 companies, mostly oil concerns and banks, are likely to go the ADR route by the end of 1996. Russian companies can only apply for level 1 ADRs. The door is still shut on NYSE-listed ADRs because issuers lack the years of required trading records and accounts. While some Russian companies – such as Lukoil – hope for a full listing on the NYSE, they will have to grapple with regulatory and accounting standards light years away from the tooth and claw Moscow markets.
Russian equities currently account for only 0.5 per cent of emerging market fund assets, though some investors believe it will turn out to be the greatest market of the 1990s. Most funds still believe Russia is too risky, and lawyers are uncertain whether investors legally own the shares they buy given the uncertainties. Other experts warn local markets will be paralysed if too much liquidity is transplanted to New York.
With the Russian government concentrating on stabilising the economy, crucial capital markets development has fallen by the wayside. Some elements, though, are coming together: a share registry system is being created, more transparent on-screen trading is being established, and mutual fund legislation is being drafted. A government report in September confirmed the commitment to creating efficient capital markets for the country’s 40 mn shareholders. The report was produced by the Federal Commission on Securities and Capital Markets, created last year to address investor concerns.
While Russia’s economic output declined by 15 per cent last year, a recent report by the OECD says that the Russian economy could grow by up to 10 per cent in 1996 if the government continues to implement tough market reforms. Still, the OECD warns that ‘the process of transformation is far from complete and its destination continues to remain unclear’.
