Romanian energy companies prepare for BSE test

Romania will try to sell minority share packages in state-owned energy companies on the Bucharest Stock Exchange this year, a move that should generate around EUR 1 billion for the public coffers, according to a state secretary in the Ministry of Economy.

Ovidiu Posirca

The government and the IMF have also agreed to appoint public managers to lead state-owned enterprises(SOEs), which should attract investments to a sector that needs upgrades of up to EUR 10 billion in the next decade according to experts, who say the price and right timing are crucial in these transactions.

Lucian Anghel, president of the Bucharest Stock Exchange (BSE), recently told a conference on the stock exchange as a growth opportunity for the economy that public offerings are crucial alternatives for financing Romania’s economy, as it currently relies solely on credit. “The last IPO of an SOE on the BSE took place in 2007 and now we have a window of opportunity; this year is of colossal importance as we aim to successfully finalize public offers,” said Anghel.

Transelectrica, the grid operator, obtained around EUR 34 million from the IPO launched in 2006, while Transgaz, the operator of the natural gas transportation system, got around EUR 63 million from an IPO in 2007.

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What do SOEs gain from being listed?
Privatizing minority stakes in companies majority-owned by the state should put Romania back on the radar of foreign investments, and the government will also benefit from increased revenue to the budget.

Alexandra Paun, junior analyst at Candole consultancy, says privatizing companies through the stock exchange reduces the opportunity for bribery and secret agreements, by bringing more transparency to the decision-making process. In addition, listed companies can have access to additional financing sources, against bank loans.

Diana Ispas, senior lawyer at law firm NNDKP, adds that SOEs can improve their rating, which will pull financing costs down, and also increase the quality of services provided to household consumers at lower prices. Ispas provided legal support to Raiffeisen Capital & Investment, the intermediary of the Transgaz IPO. She says privatization through a stock exchange is faster, as it takes around six months to carry out an IPO under normal market conditions.

“The listing of these companies will increase their visibility, allowing them to ease the initiation of partnerships with large international energy companies,” says Alexandru Lupea, partner, audit services, and leader of the group for industry of energy, mining and utilities, at consultancy firm PwC Romania.

Countdown to the big day
In preparation for the listing seasons, the Romanian government approved last November an emergency ordinance for the implementation of corporate governance in SOEs. Under this piece of legislation, the board of directors will be independent and allow only two state employees as members, after a rigorous selection procedure.

In addition, the position of chairman of the board of directors needs to be separated from the general manager role. At the same time, financial statements and annual audit reports should be made public.

In January, a new law came into force stipulating that the listing procedures for SOEs in the Property Fund (FP) be initiated by the end of this year. The FP has minority stakes in the companies that have planned IPOs for this year. It has a high exposure to the energy sector as 86 percent of the fund’s net asset value (NAV), EUR 3.48 billion, is included here.

The IPOs of Hidroelectrica, Romania’s largest energy generator, and Nuclearlectrica, the nuclear energy generator, scheduled for October, will involve share capital increases, after 10 percent stakes were listed on the BSE.

The Ministry of Economy will organize secondary public offerings (SPOs) for Transelectrica, the grid operator, and Transgaz, the natural gas transportation company, each with a 15 percent stake, this April. The government will also retry to sell a 9.8 percent stake in oil and gas producer OMV Petrom, a deal which failed last summer due to an insufficient subscription level.

The state has already selected investment consortiums for Translectrica, Transgaz and Romgaz, and investment banking giants Goldman Sachs and Erste are among them.

A banking source, close to the public offerings, told BR that most companies scheduled for listing this year are well prepared and have a sufficient level of profitability. In addition they have the requested structures and the IFRS numbers in place.

Right price

Balancing the transaction price makes the difference between success and failure in a public offering and the state should be aware of this, experts advise.

“A high price will discourage investors and could lead to the failure of the share offer, while a low price means the state will not maximize revenue from the privatization,” says Lupea at PwC.

Ispas says the right price needs to be “discovered” in order to safeguard the shares, at the same time being a price recognized by the market in the medium term in order to avoid significant differences in the trading share value after the offer is finalized.

Paul Mihailovitch, head of ECM Emerging Europe at JP Morgan, recently told a conference on the upcoming privatizations in Romania that establishing the right price is not a magic tool that allows any company to sell shares on the stock exchange.

“In general I think it is better if you don’t have high expectations of the offer price and consider instead the long-term importance of a successful IPO,” said Mihailovitch.

Laurent Cassin, head of CEEMEA equity capital markets at Societe Generale, told the same conference that completing the transaction is paramount, because the government will attract FDI and generate both liquidity on the domestic stock exchange and investment opportunities for ordinary Romanian citizens.

“Selling minority stakes in the companies can potentially weigh down the price as strategic investors might not be attracted to invest,” warns Paun of Candole.

A 9.84 percent stake in Petrom failed to sell last summer, although the government set a minimum price below the average trading price of Petrom’s shares at that time. The consortium that carried out the SPO blamed worsening conditions on the international markets and cautious investors as the root cause of the unsuccessful public offering.

“The failure of the Petrom SPO last year will have no direct negative impact on the government’s plan to tap the equity market in 2012. Investors are not looking for opportunities in the past,” said Mihai Caruntu, equity analyst at BCR. The bank is part of the investment consortiums selected for the Transelectrica and Romgaz public offerings.

Lupea says the share price can increase if the government decides on a timetable to deregulate energy prices, in electricity and gas.
“This calendar will allow investors to estimate with greater accuracy the future gains in these companies, increasing the market value of the shares,” says Lupea.

Caruntu says the listing of Romgaz this year is realistic, although import prices for non-residential consumers   are 2.5 times as much as domestic gas prices.

The BCR analyst says market prices for Transelectrica and Transgaz look attractive and the two regulated utilities could be success stories in the long term if the Romanian energy authority applies the methodology for calculating transmission tariffs.

Listings attract presidential support
Romanian President Traian Basescu addressed Parliament last week, telling MPs that selling minority stakes in Transgaz, Romgaz and Hidroelectrica will allow these companies to invest in modernizing their capacities.

The president said gas prices for companies should be deregulated in order to support the costs of extracting this resource, citing the gas discovery made by ExxonMobil and OMV Petrom in the Black Sea this February.

Exploration works revealed between 100 and 110 billion cubic meters of natural gas that will guarantee Romania’s supply on the medium term. The president says another five deposits with the same characteristics have also been revealed during the ongoing exploration works.

“We can maintain lower prices for household consumers, but the economy needs to receive the right input on gas and electricity consumption,” said President Basescu.

The deregulation of electricity prices for companies will start in the coming months and end next year, while household consumers will pay cheaper bills by 2017. On the gas market, the situation remains unclear, as the government needs to define the vulnerable consumer that will be protected from higher gas bills. The next review mission of the troika (IMF, EC, and WB) scheduled for next month should set out a deregulation calendar in this area.

Time is of the essence
Experts say the most important success factors for an IPO or SPO are the timing of the transaction and the right services from an investment bank, which has to make the companies as appealing as it can.

“2011 was excellent for peripheral markets and then we had the collapse in the second half of 2011, and Romania fell off the investment radar again,” said Tom Attenborough, managing director of capital markets origination at Citigroup, during a conference organized on privatizations on the BSE. He added that energy stakes could be of interest to general European funds, which look at utilities.

According to Lupea, the current international context is the most favorable since the crisis started. “Indices of the main stock exchanges are at the maximum level of the last three years and have been growing since the start of this year,” says the PwC partner.

A banking source involved in one of the public offerings told BR that the conditions are not the best at this time due to the turmoil on the stock exchange last year and the ongoing sovereign debt crisis. However, the markets stabilized in Q1 2012 and transactions have resumed so the right investment perception and price for SOEs could make them attractive to investors.

The Candole analyst says international sentiment towards Romania is improving and the country’s macroeconomic figures are encouraging, so the time is right for privatizations.

Aiming for Pole position
The Warsaw Stock Exchange (WSE) is certainly a success story and could represent a source of inspiration for the BSE. Around 38 successful IPOs were carried out on the WSE last year, while the last significant privatization on the BSE was in 2007.

The WSE had a market capitalization of USD 162 billion in February, while the BSE registered around USD 31 billion earlier this March.

The PwC partner says Romania should follow the Polish model in terms of privatizations and development of the domestic capital markets.“Stock exchange privatizations were the main factor that made the WSE the most attractive in CEE for liquidity and market capitalization,” says Lupea. He adds that this developed the Polish financial system, also attracting foreign issuers and investors.

“Romania is a growing economy with potential, but it’s more complicated to invest on the BSE than in Hungary or Warsaw,” said Richard Cormack, head of growth markets including CEE, CIS, Turkey and MENA at Goldman Sachs, at a recent conference.

BR has learned from a banking source close to the ongoing public offerings that foreign investors looking to invest on the BSE are still confronted with rather complicated and unusual paperwork, and additional alignments to international standards could certainly make the domestic market more attractive in the region.

ovidiu.posirca@business-review.ro

SOEs’ financial results in 2011

Romgaz – IPO/SPO (15 percent stake) – turnover:  EUR 922 million; net profit: EUR 179.8 million

Transelectrica – SPO (15 percent stake) – EUR 684 million; EUR 21.2 million

Transgaz – SPO (15 percent stake) – EUR 306 million, EUR 92.4 million

OMV Petrom – SPO (9.8 percent stake) – EUR 5.3 billion; EUR 873 million – state has minority stake

Hidroelectrica –  IPO/SPO (10 percent stake) – EUR 705 million; EUR 3.7 million

Nuclearlectrica (budget values) –  IPO/SPO (10 percent stake) – EUR 386 million; EUR 3.2 million

Source: companies

Results converted to EUR using the average RON/EUR exchange rate in 2011 of 4.237