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RUSAL raises $2.24 bln in Hong Kong IPO

Russia's UC RUSAL raised $2.24 billion through its initial public offering, bringing the debt-burdened company a step closer to being the first-ever non-Asian company to have a primary listing in Hong Kong.

RUSAL's IPO is a big step toward paying back a huge pile of borrowed money and a key offering for the Hong Kong Stock Exchange, which is trying to attract more foreign companies from outside Asia.

The IPO of the world's largest aluminum producer priced at the middle of an indicated range, two sources familiar with the deal said on Friday, a sign that may indicate that demand wasn't strong enough to hit the top end.

Still, given RUSAL's debt load and the other risks, the price shows that institutions were willing to back the IPO.

“Even though it's high risk, institutional investors invested in the IPO because its the first Russian company to list in Hong Kong, and because they see further upside to aluminum prices this year,” said Steven Leung, director of institutional sales at UOB-Kay Hian.

RUSAL sold 1.61 billion new shares, or just under 11% of its enlarged share capital, at HK$10.80 each, the sources told Reuters. The IPO's indicated price range was HK$9.10 to HK$12.50.

UC RUSAL will also list shares in Paris in the form of Global Depositary Shares (GDSs), with each GDS representing 20 ordinary shares.

The offer price of HK$10.80 values the company at 12 times EV/EBITDA -- a measure of cash flow, according to London-based Independent International Investment Research.

By comparison, peers Aluminium corp of China Ltd (Chalco) trades at 11.2 times 2010 basis EV/EBITDA, while US-based Alcoa trades at 11 times, according to a Merrill Lynch research report.

One source close to the deal said that the recent drop in Chalco shares has given some investors hesitation when considering RUSAL's final IPO price. Chalco's Hong Kong shares have fallen about 15% since January 11. All sources quoted in the story declined to be identified because they were not allowed to speak publicly about the deal.

RUSAL's trading debut is set for Jan. 27, under the symbol “486”. Assuming the company exercises the overallotment the company will increase the size of the IPO to $2.56 billion.

The Hong Kong Stock Exchange produced more than $30 billion worth of IPO proceeds last year, more than any other exchange globally. The exchange is trying to attract more non-Asian companies by touting Hong Kong's international business community, modern city, and proximity to China and the rest of the Asian markets.

So far, Russian companies have taken the bait. On Thursday, a top executive from Russian Railways, the country's large, government run rail operator, said the company was eyeing the Hong Kong Stock Exchange to list various units.

Hong Kong regulators, however, are aware that hosting companies from abroad comes with risks, especially from industries the listing committee is generally unfamiliar with.

RUSAL's offering has received heavy scrutiny from Hong Kong's financial regulators, thanks to the company's huge debt burden, outsider status and controversial founder, Russian billionaire Oleg Deripaska.

“Fundamentally speaking, investors should avoid buying into RUSAL, as it bears the huge debt burden and in terms of valuation, it is expensive. Investors have plenty of choice from the market after the recent correction of stock market,” said Y.K. Chan, a strategist at Phillip Capital Management.

The IPO was eventually blocked from retail investors as a precaution, although some of the risk was reduced on Thursday when Russian lenders Sberbank and VEB agreed to refinance a $4.5 billion loan due on October 29.

Around 40% of the offering had already been subscribed to by cornerstone investors, including Nathaniel Rothschild's company, US hedge fund Paulson & Co, Malaysian-Chinese businessman Robert Kuok Hock Nien and Russian state bank VEB, with a lock-up period of six months.

Cheung Kong Holdings, the Hong Kong property group controlled by Asia's richest man, Li Ka-shing, is investing $100 million in RUSAL.

One of the sources said the IPO attracted more than 300 institutional investors.

However, the deal failed to attract two of Asia's most influential sovereign wealth funds, China Investment Corp (CIC) and Singapore's Temasek Holdings, which manage a combined $420 billion.

RUSAL revealed a $868 million net loss for the six months ended June 30, 2009, versus a year-earlier profit of $1.41 billion. The company has said growth in aluminum prices will be crucial to recovery.

The price of aluminum has risen nearly 80% since trading at a seven-year low in February 2009, mirroring the world's recovery from the financial crisis.

BNP Paribas and Credit Suisse are the joint sponsors and global coordinators. The joint bookrunners are BofA-Merrill Lynch, BOC International, Nomura Holdings, Renaissance Capital, Sberbank and VTB Capital, with Rothschild acting as the financial adviser. (Reuters)