Sunday, November 25, 2007

Romania: Transgaz IPO

Oxford Business Group Latest Briefing

On November 26, many expect a new record to be set for Romania's capital markets sector. As of this date, investors will be able to begin subscribing for the initial public offering (IPO) of Transgaz, the state-owned natural gas transmission company. Investors and analysts alike are anxiously awaiting the event, which is expected to be the largest of its kind so far witnessed on the Bucharest Stock Exchange (BSE).

Transgaz is the technical operator for the national gas transmission system in Romania. Its network of pipelines, stretching over 11,000 kilometres, not only carries most of Romania's natural gas, but also connects the country to pipelines in Hungary, Ukraine and Bulgaria.

Importantly, the company is also a crucial part the Nabucco gas pipeline project. This project, which is set to be completed in 2012, is expected to greatly diminish Europe's reliance on Russian oil and gas by linking the European continent's existing pipelines to energy supplies in Iran, Azerbaijan, Kazakhstan, Turkmenistan, Egypt and Syria.

Transgaz's stake in this project extends beyond the fact that Romania will have a key section of the 3300-kilometre pipeline. The company also holds a 20% stake in Nabucco Gas Pipeline International, the consortium formed to build and manage the pipeline. This could prove valuable if Transgaz should decide to sell, which is a possibility as it is rumoured Gaz de France and the German RWE are interested in purchasing a large stake from any of the consortium's five owners.

At the moment, Transgaz is entirely owned by the Romanian state. The ministry of economy holds an 85% stake, and the Fondul Proprietatea, a fund set up by the government to compensate Romanians whose properties were seized under communism, holds the remaining 15%.

In October 2007, the government announced it planned to raise roughly 67m euros ($99m) by selling a 10% stake in Transgaz through an IPO on the BSE. The government promised the funds would be used to finance the planned renovation and modernisation of the national transmission system. The renovation, which aims to improve the system's operation and efficiency, will focus on upgrading the existing pipelines and compressor units, as well as adding metering installations to monitor usage and leakages.

The planned IPO, starting on Monday, will end on December 7. The shares will be offered for subscription in two stages: 60% of the IPO is to be allotted to large investors, with subscriptions that exceed 500,000RON ($206,000). The remaining 40% will be open to small investors with subscriptions ranging from 2000RON ($824) to 500,000RON.

Many analysts have said they believe the company's key role in the region's energy politics, combined with Europe's growing demand for natural gas, will attract a strong interest from investors worldwide. Steven van Groningen, chairman of Austria-based Raiffeisen Bank, the firm in charge of preparing the offering, stated the Transgaz IPO could attract more than 10,000 investors. This number would far surpass the 5000 investors who subscribed to the Transelectrica IPO last summer, which is regarded by many as the most successful government privatisation to date.

If these predictions come true, the Transgaz IPO could play an important role in supporting a market, which, in the last few months, has witnessed one of the most severe corrections in recent memory. Investors, fearing the fallout of the financial crisis in the US, have fled emerging markets in droves. "I believe the IPO of Transgaz will move the market and bring Romania

The IPO comes at a perfect time to test new changes to the BSE. "The Transgaz public offering will use allotment rights for the first time in Romania, with trading set to begin approximately three days from clearing. This way, investors will no longer have their money stuck for two months, and will be able to sell their investment as early as this year. We anticipate the trading of the allotment rights will start around December 19," said Dana Mirela Ionescu, general manager of Raiffeisen Capital & Investment Romania.

The introduction of allotment rights trading is meant to close the gap between the point at which an investor subscribes for an IPO and when he can actually begin trading his shares. Up until now, investors have had to wait weeks, and in some cases months, for the IPO to clear government regulators. Under the new system, investors will be granted allotment rights for every share they have been awarded through the IPO subscription. These rights can then be traded or sold in the same way as a normal stock. Once the stock clears the regulators' desks, all allotment rights will be converted into Transgaz shares.

Analysts hope that such changes can bring a new enthusiasm to the market, but they are realistic about the real problems facing the BSE. "Volumes are far too low to attract serious international attention," said Cristian Sima, president of World Wide Brokerage Service and a former BSE board member.

This is where the Transgaz IPO may have its largest effect. If 10,000 investors turn out for the IPO - as suggested by van Groningen earlier this week - this would amount to a figure equal to the average number of active investors on the BSE over the past several months. While doubling the market's daily volume is unlikely, it is clear the size and importance of this IPO could reinvigorate the BSE at a time when markets worldwide are in desperate need of encouragement. back to the attention of foreign investors," said Adrian Caramiha, deputy general manager of Broker Cluj.

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