You're reading: Consolidation of Ukrainian stock market brings new opportunities to investors

The merger of Ukraine’s two main stock trading platforms, Ukrainian Exchange and PFTS, should provide an impetus for the nation’s vastly underdeveloped capital market lacking in liquidity and significant trading volumes. Having a combined turnover last year of nearly $15.5 billion, investment bankers told the Kyiv Post that the merger should boost and concentrate liquidity in one place, while improving efficiency and reducing overhead costs.

“Merging the two exchanges will improve the infrastructure of the stock market and boost liquidity,” said Dmytro Churin of Eavex Capital.  

The bigger prospect is that the merger can create a combined trading floor where companies can raise capital instead of seeking to raise money abroad or face exorbitant loan interest rates at home. Dragon Capital investment bank director Dmytro Tarabakin says the “Ukrainian stock market needs a complete reboot in order to prevent it from collapsing and is at risk of losing jurisdiction.”

In recent years Ukrainian shares have suffered from low liquidity. To raise investment capital, local companies have conducted initial public offerings abroad, mainly at the Frankfurt Stock Exchange, London’s AIM and Warsaw Stock Exchange.

The Moscow Stock Exchange is the principal shareholder of the two exchanges, owning a 50 percent plus 1 share of PFTS and 43 percent of Ukrainian Exchange. However, PFTS is still recovering after losing 75 percent of its value in the wake of the 2008 financial crisis. It is still the larger of the two with $14 billion in turnover last year, compared to the Ukrainian Exchange’s $1.3 billion.

“Everything depends on the development strategy of the combined exchange,” says brokerage firm Univer managing director Alexey Sukhorukov. “The Moscow Exchange is passive towards its Ukrainian projects, and there are fears that it will not develop them. The risk is very large and it is unclear whether there is any sense to be a shareholder of the UX as its position and strategy are unknown.”

Making the Ukrainian stock market more efficient is just one step towards attracting capital investment in Ukraine. On Jan. 31, Sergey Danov the Moscow Stock Exchange’s representative at PFTS, said plans are in place this year to begin trading Eurobonds, introduce a futures market and amend the repurchase agreement market to increase liquidity. Ukrainian Exchange also has plans to launch internal bonds dealing through a web trading system.

Coupled with the new government’s pro-European policy, foreign investors might be lured back to the Ukrainian stock market. This year the market may grow by dozens of percent, analysts predict. This year though, Eavex Capital’s Churin does not expect any Ukrainian companies to conduct IPOs on domestic platforms or even on foreign exchanges due to the difficult political situation in the country.

Merger scenarios

Major and minor shareholders of the two exchanges have their own vision of how this merger should be settled. The Moscow Stock Exchange has until April 23 to agree to the merger conditions or the deal is off.

MSE wants to merge the platforms, while the minority groups want the PFTS to simply absorb the UX. The conflict came to a head after Jan. 21, when the supervisory council of the PFTS agreed to a merger plan preferred by the UX, which proposes that MSE buy out the shareholders of the UX and arrange for shareholders of both platforms to share management of the new exchange.

This prompted a dissident group of local minority PFTS shareholders to react. Their March 4 plan includes approving the valuation of both exchanges, then exchanging UX shares for a stake in an additional share emission of the PFTS. In short, it would be a buyout – not a merger.

“If the procedure proposed by the shareholders of the PFTS is played out, the actual merger will occur by September. However, if the deal is done the way the UX shareholders want it, which is to accumulate resources to purchase UX shares and only then consider unification, the time will take at least 4-6 months, or even not until the spring of 2015,” explained Olena Amitan, chief executive officer of Altana Capital which is a minority shareholder of PFTS.

In the end, MSE would owe 50-60 percent of the new platform, with the remainder owned by Ukrainian investors, she added.

However the merger unfolds, argues Danov of MSE, it will “light the spark for the market’s development and attract investors.”

Kyiv Post business journalist Evan Ostryzniuk can be reached at [email protected]