Property Fund administrator takes on state as listing nears

Romgaz’s “donation” of RON 400 million to prop up a weak state budget to the detriment of the company’s shareholders (including the Property Fund), the opportunity – or lack of it – on the issue of the two national energy champions and the international road show to promote the fund to international investors all rank high on the to-do list of Greg Konieczny, executive VP of Franklin Templeton Investment Management Limited Bucharest and portfolio manager of the Property Fund for this year. He told Business Review that the first major hurdle is the fund’s listing on the Bucharest Stock Exchange on January 25, while an ongoing challenge is to increase the value of the companies in the fund’s portfolio, which has a significant exposure to the energy sector where the state holds a majority.

After years of uncertainty, the long-awaited listing of the Property Fund on the Bucharest Stock Exchange is due to take place on January 25. The fund’s administrator – Franklin Templeton Investment Management Limited Bucharest – said through its executive president that recent experience in Eastern Europe indicates that initial public offerings (IPO) are a viable option.

The total value of Eastern Europe IPOs reached EUR 5 billion last year, while the whole of Europe generated EUR 26 billion. In Eastern Europe about EUR 1 billion was attracted by utilities companies alone.

The listing of the Property Fund is major news, and with each day the adrenaline is rising among investors. Transactions involving shares in the fund

have exploded over the last year, with about 30 percent of the stock changing ownership.

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According to media reports, the estimated value of transactions – based on average prices in the market – reached about RON 2 billion (over EUR 460 million), representing 35 percent of total turnover in shares on the local stock exchange.Foreign investment funds, SIFs, speculators and well known politicians appear on the list of investors who have bought Property Fund shares worth tens of millions of euro between 2008 and now, dreaming of a selling price as much as five times greater than they paid.

Over the past three years, the fund securities have changed hands for between a minimum of RON 0.1 (December 2008) and maximum of RON 0.6 (September 2010), so if the price climbs after the listing to more than RON 0.6, most buyers will make a decent profit.

And investors are starting to smell the money, with brokerage houses seeing a 30 percent hike in value compared with the share’s price in September last year. For instance, Tradeville evaluates a Property Fund share at RON 0.8, following a comparative analysis of similar international funds. According to the same source, the fund’s shares traded at RON 0.5 at the end of last year.

The Property Fund’s listing is expected to have a positive impact on the Bucharest Stock Exchange’s operations. The fund will be the second largest issuer on the stock market in terms of market capitalization after OMV Petrom (SNP), but with a significantly higher free-float of EUR 2.1 billion compared with EUR 0.4 billion for the SNP.

The fund’s listing is expected to double the volume of trading on the local stock exchange and will set new quality standards for asset administration.

On the next page, Greg Konieczny, executive VP of Franklin Templeton

Investment Management Limited Bucharest and portfolio manager of the Property Fund, tells Business Review about the administrator’s strategy for the fund.

Company profile – Property Fund

2010 Profit RON 456.3 million (EUR 108 million)

Portfolio The fund includes participations in 83 companies (28 listed on the Bucharest Stock Exchange and 55 unlisted). Its portfolio is 80 percent focused on energy companies

State stake The state’s stake fell below 39 percent on December 25, 2010, with private and institutional investors controlling 42 percent and 19 percent share packages

Actives The actives’ net value reaches RON 15.3 billion (EUR 3.57 billion), equivalent to RON 1.11 (EUR 0.26) per share

Dividends The fund paid dividends of RON 0.0816 per share for 2008 and 2009

What measures can and will you take in order to change the portfolio’s structure?

Although the portfolio has some of the largest energy companies in Romania, there is still work to be done to increase its overall value for our shareholders, which is one of our primary objectives. We are analyzing companies one by one and we will share with the shareholders our proposals regarding the portfolio as we have more information to provide. The portfolio includes over 80 companies and there is significant exposure to the energy sector.

Based on the results of the analysis of portfolio companies, we will determine what investments are most advantageous to our shareholders, irrespective of the sector.

Are the companies in the portfolio undervalued?

We have applied the new National Securities Commission (CNVM) regulations regarding the calculation of the Net Asset Value according to international standards, which has been widely adopted in both developed and emerging markets. Going forward, our focus will be the long-term capital appreciation of our portfolio.

What problems have you encountered with the portfolio companies?

In most of the companies we have in the fund portfolio, we only have minority stakes.

What we do is provide active management of the portfolio, including taking part in the management of the companies in the portfolio where possible.

After all, we have representatives on the boards of some of the portfolio companies and we try to make our views known, especially as regards improving corporate governance and efficiency. We know there are valuable firms in our portfolio but I am sure there is room for improvement, and we are willing to offer our advice and expertise to bring about such improvements.

What are your alternative solutions for the two national energy champions scenario?

With the energy champions, we are asking for a more thorough analysis with regard to their viability and profitability. We think such projects should not be done hastily as they may impact the broader energy industry.

There needs to be more consideration for what this impact might actually be. Of course, our main concern is the possibility that our shareholders might be disadvantaged from the planned mergers. We want to ensure fair treatment for our shareholders, which is why we recommended to the government that it give more thought to this matter and include all interested parties in the discussions.

What are your main concerns regarding Romgaz’s situation?*

Regarding Romgaz, from the outset, we signaled the government’s inherent conflict of interest in this matter. As majority shareholder the state has voted in favor of a donation to itself and we feel this is truly unacceptable. We believe that the Romgaz issue can be easily resolved and have offered a solution to the government on many occasions. We recognize that the government is in financial trouble and that the deficit needs to be contained, but we have recommended a special dividend from the profit of Romgaz distributed fairly to all shareholders.

The state gets its part as majority shareholder, but the same must happen with the Property Fund, which owns 15 percent of the shares. We really want the government to understand that beyond hurting the shareholders of the fund, the “donation” can be seen as a dangerous precedent and will only add to the concerns of international investors regarding the Romanian business environment.

The state might win some short-term benefit today from going forward with this donation, but it will lose much more money in the future. A country where the government has the authority to impose such arbitrary decisions and ignore minority shareholders does not look like an attractive market to international investors.

If this happens to Romgaz now, who can guarantee it won’t happen to other firms in the future? We hope the government understands our position, which is ultimately in its long-term interest as well. They are our partners in many companies in the fund, so we want to collaborate and have a real dialogue.

How many lawsuits have you already set in motion and who bears the financial costs?

As far as lawsuits are concerned, it is true we have had to start legal action where we thought it was in the best interests of our shareholders, but decisions to sue are weighed up very carefully. We believe it is our role to protect our shareholders’ interests through any means we consider necessary.

Who is interested in investing in shares in the fund?

We are involved in an international road show to promote the fund to international investors, which started January 13, so it is premature to assess how much interest there will be in the shares. In general, we’re seeing significant interest in emerging markets such as Romania.

What is the status of the Bucharest Stock Exchange listing of the fund’s shares?

We filed the prospectus with the CNVM on 3 December and on 16 December the CNVM approved the prospectus which opens the door for trading on the Bucharest Stock Exchange. In January we will be holding an international road show in major European financial centers to promote the fund to foreign institutional investors. The listing on the Bucharest Stock Exchange will be done on January 25.

What is your response to the former Hidroelectrica’s GM’s accusations of “amateurism” on your part?

We are pleased to have initiated this discussion, which was our aim in the first place.

We need to engage with the management of the companies and with the government about making these firms more efficient, and as such increasing their value to everyone’s advantage. They can definitely become more efficient with improved standards of corporate governance.

The discussion has started and we are keen to continue raising these issues. After all, we only want to help with the advice we give and the case of Hidroelectrica is no exception.

*After the interview was conducted, Franklin Templeton Investment Management officials reported that RON 400 million had been transferred to the state budget in the form of a “donation” from Romgaz. The Property Fund announced though a press release that it would use all legal means to recover the sum by annulling the Romgaz GSM’s decision of November 30, 2010 which approved this donation. Additionally, the fund has called for a GSM on January 17, to bar all administration council members who voted in favor of the donation and to initiate legal action against them.

CV Grzegorz Konieczny

1995 Joins Franklin Templeton, with responsibilities for CEE excluding Russia

-1995  Director of Capital Markets transactions with Bank Gdanski in Poland

1994 Obtains Investment Advisor license from the Polish Securities and Exchange Commission. He holds an MA in Economics and Foreign Trade from the University of Gdansk

Dana Verdes