NOT AN IPO OR SPAC
Russian message service Telegram hopes to raise $1bn with a convertible bond private placement
The super secure Telegram messenger service, developed by Russian-born software icon Pavel Durov, is looking to raise $1bn through a bond placement to a limited number of investors from Russia, Europe, Asia and the Middle East, the Kommersant daily reported citing unnamed sources on February 18.
The issue reportedly comprises exchange bonds that could be converted into equity in the messaging service that is currently 100% owned by Durov and his brother Nikolai.
Kommersant reports that the price of the conversion would be at a 10% discount to a potential IPO should it happen within five years.
The minimum bond placement is said to be set at $50mn, but could be lowered to $10mn. Five-year bonds could carry an annual coupon of 7-8%.
In Russia, potential investors have received offers to buy bonds from VTB and Aton, which are the financial agents for the Russian market, reports Kommersant. Aton declined to comment and VTB did not respond to Kommersant's requests for information.
Durov has already raised $1.7bn from the biggest ICO (Initial Coin Offering) in history to fund the development of his Telegram Open Network (TON) blockchain, but he later abandoned the project due to objections by the Securities and Exchange Commission (SEC), which said the sale of its GRAM coins was the sale of an unregulated security.
As bne IntelliNews reported in January, Durov was already in talks with potential investors to raise fresh investment capital using debt when the SEC ordered him to return $1.2bn of the $1.7bn he raised in the ICO by April this year, as reported by The Bell.
Investors are very keen to get their hands on Telegram’s equity as emerging markets (EMs) have seen a string of mega-IPOs in the last six months and tech stocks are currently hot. Telegram is one of the few companies working in the social media sphere that remains 100% privately owned. At the moment Telegram makes no money at all, being privately funded by Durov and the capital he has raised.
Analysts surveyed by Kommersant believe that raising funds through an IPO would not be beneficial at this stage, as Telegram could monetise its services and improve on the $30bn that market participants currently estimate it is worth.
Exchange bond borrowing is common for venture deals with a small number of participants, but they remain rare for a Russian company.
Telegram on the rise
Telegram has been on something of a roll recently, as it is the service of choice for democracy protesters around the world from Hong Kong to Tehran, Minsk and Moscow.
Its privately owned status and Durov’s promise not to co-operate with governments’ security services and his lack of contact with Big Tech corporates has created a bond of trust between him and his users.
And in January the service got yet another boost after the popular messaging service WhatsApp – one of Telegram's main rivals – suffered from an exodus of users after it changed its terms of service. Media reports suggested the service would share its users’ data with its parent company Facebook. With more than 2bn users around the world, millions deserted the WhatsApp platform and the message service of choice they went to was Telegram: 25mn users downloaded the Telegram app in 72 hours alone.
Durov is also the author of the wildly popular VKontakte.ru (vk.ru), the Russian speaking world’s answer to Facebook, that was launched in 2006, and built Telegram while he was still running vk.ru.
The service has been gathering new users at a rapid pace thanks to its reputation for being uncrackable.
In 2019 the Federal Security Service (FSB) demanded that Durov hand over the digital keys to Telegram and allow it to read messages transmitted by the service. Durov refused and the authorities tried to block Telegram. And failed miserably.
Roskomnadzor, the Russian media watchdog, failed to shut Telegram down as the service flipped from one server to the next, but Roskomnadzor did manage to shut down its own site, and hundreds of others, by mistake.
After humiliating the Russian authorities and the FSB, two years later the government finally gave up and the message service was unblocked again.
Telegram couldn't have organised a better marketing stunt if it had tried. New users flocked to the service during the showdown and government officials continued to use it while the campaign against the service was still on – for the very reason that made the service so popular in the first place: it is impossible for the FSB to eavesdrop on your conversations, but the most popular Telegram channels reached millions of people.
For these reasons Telegram has been the preferred service in Iran, where the opposition use it to communicate and the government there was similarly frustrated in its effort to ban the service. In the mass protests that broke out in Belarus following the disputed August 9 presidential elections the go to news service was Nexta – a Telegram channel, which briefly became the most read news service in the world. Try as he might, Belarus' self-appointed President Alexander Lukashenko was also unable to shut the service down. As a result of all this Durov has emerged as a sort of folk hero to many in Eastern Europe.
Since the Russian government dropped its effort to ban Telegram it appears that Durov is now a bit of a poacher turned gamekeeper. Last August Durov submitted an anti-trust complaint against Apple to the European Commission, the Financial Times reported on July 30 citing the text of the complaint. Telegram urged the EC to push Apple to “allow users to have the opportunity of downloading software outside of the App Store”. The Kremlin has been pushing the same line as a way of breaking Apple’s hegemony for Russian companies like Yandex.
Shortly afterwards, Telegram VP Ilya Perekopsky was invited to participate in the panel on IT development with Prime Minister Mikhail Mishustin, the first official contact with the authorities since Durov's self-exile in 2014.
VK.ru
Durov has already got one tech deal under his belt after a shareholder dispute over VK.ru nearly brought Telegram down in its earliest days.
In 2013 Russia’s UCP fund amassed a 48% stake in VK.ru and took Durov to court, arguing that Telegram had been developed using VKontakte resources and therefore was UCP’s property.
It looked like Durov was going to lose control of Telegram, until Russian tech tycoon Alisher Usmanov’s Mail.ru Group came in as a white knight, along with Usmanov’s partner Ivan Tavrin, and acquired Durov’s shares in Vk.ru in the middle of the showdown.
While some have claimed that Durov was forced into the sale, a claim that he has denied, the buyout by Usmanov effectively ended UCP’s claim on Telegram. Mail.ru Group, part-owned by Usmanov, already held 52% of VKontakte and bought the remaining 48% of the social network in a $1.47bn all-cash transaction, which emerged from the duel independent and unscathed. Durov then turned his full attention to developing Telegram.
Big business
With Telegram up and running, Durov, who now lives and works in the UAE, launched his next big project: the TON blockchain that promised to work many times faster than existing versions and could potentially disrupt the entire global banking and credit card system by offering an alternative platform for financial transactions.
In 2018 Durov held the biggest ICO ever and raised $1.7bn to fund the work. However, TON eventually ran aground, and Durov halted his TON blockchain project in May 2020, after a prolonged struggle with the US SEC, which banned the blockchain.
In 2017 Telegram has spent $70mn, and planned expenditures for 2018 were $100mn, $130mn in 2019 and $170mn in 2020.
Under the out-of-court agreement in the US Telegram was ordered to pay a fine of $18.5mn as well as being ordered to pay back $1.2bn of investment in the GRAM tokens that were sold during the ICO.
The $1bn of convertible debt the company reportedly intends to issue will presumably be used to pay back Durov’s investors into TON and continue the development of the blockchain.
As a result, Durov's estimated worth has gone up ten-fold. As Telegram doesn't actually make any money, the way these companies are valued is assessing the value on the basis of the number of users. Typically, a large social media network values each user as worth $35-$40 of potential monetisation. With over 500mn users worldwide that would value Telegram on the order of $17.5bn to $20bn, although other estimates now value the company at closer to $30bn.
Raising the money should be easy, as tech companies are hot at the moment. In just the last six months Kaspi.kz, a Kazakh-based fintech company, and Ozon.ru, a Russian e-commerce company, have both pulled off spectacular IPOs, raising $870mn and $1.2bn respectively. Capital markets have massive excess liquidity thanks to all the anti-coronavirus (COVID-19) stimulus programmes being run around the world, and with the developed equity markets already over-bought investors are risk-on for new equity offerings, especially from the sexy tech sector. Investors are salivating at the prospect of getting access to Telegram’s equity, but there will still be a while to wait.
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