Monday, January 24, 2011

The Financial Times: Romania: a €3.6bn power pack

January 21, 2011 
by Stefan Wagstyl

The listing of Fondul Proprietatea, a €3.6bn investment fund, on the Bucharest stock exchange on January 25 could transform the Romanian equity market – as long as the country’s politicians and bureaucrats don’t get in the way.

The fund, a trust for compensating Romanians dispossessed under Communism, will boost the €22bn market value of the Romanian stock market by around 15 per cent and the value of domestic equities by around a third. With large chunks of BSE-listed stock held by the state or foreign multinationals, the domestic equity free float will soar 80 per cent. For fund managers, there will suddenly be a lot more to go for. But, needless to say, there are caveats.

Fondul (FP) comes to market with a lot in its favour. It has a portfolio of stakes in 83 state and ex-state companies mostly in energy. They are headed by a €891m interest in Petrom, the oil group controlled by Austria’s OMV, €767m in Hidroelectrica, the state-run hydropower operation, and €291m Romgaz, the state-run gas company.

Formed by the government in 2005, the company has seen its state shareholding fall to 39 per cent as it has honoured dispossession claims and will fall further as more claims are accepted. Keen to improve management and boost the valuation, Bucharest last year hired Franklin Templeton of the US to manage the fund.

And, as beyondbrics has reported, Templeton has not been afraid of tackling the government head on, successfully challenging an ill-inconceived electricity restructuring plan and, in a dispute that is still rumbling, arguing over a lop-sided special dividend paid by Romgaz to one shareholder only (the government).

With the share trading recently in the over-the-counter market at around 0.52 lei there would seem to be plenty of upside. Raiffeisen, one of the banks backing the listing, says that given the political risks involved it is right to apply to the fund’s estimated net assets of €3.3bn a discount of 20 per cent. This gives fair value of €2.7bn and a share price of 0.84 lei. Raiffeisen sees considerable scope for gains as Franklin Templeton gets to grips with the portfolio and forecasts a 12-month target price of 0.96 lei.

But much depends on the political risk. An investment in FP is a multiple bet – on the government’s policies towards FT, towards energy and towards the economy as a whole. The economic history of Romania since the overthrow of Communism in 1989 is a history in which the politics of energy have figured prominently from miners’ strikes in the early years to later privatisation disputes.

If Romania, a European Union member since 2007, is now committed to developing a market-oriented energy sector (albeit a regulated one, as in many EU states), FP looks a steal. The country is around a decade behind the most developed of the ex-Communists states which have joined the EU, notably Poland. So if Bucharest stays the course, there is plenty to go for.

But, the track record is one of lurching progress rather than consistent development. A financial crisis forced reform in 2000; more followed with the push to join the EU in 2004-7; and another advance has come with the global economic crisis which brought the International Monetary Fund, supported by the EU, to Romania with a €20bn rescue programme.

The IMF package is now expiring and in its place Bucharest wants to secure a €3.6bn standby fund, for emergency use only. So the IMF will remain involved but in a weaker position to exert pro-reform pressure. Meanwhile, parliamentary elections are due next year.

Fondul’s fund manager Grzegorz Konieczny says the need to raise money will keep the government backing FP’s plans to modernise the companies in its portfolio and bring them steadily to the stock market.”In order to pay back the IMF programme, the government has to sell holdings. Money is the main driver,” Konieczny said at a press briefing in London on Thursday.

FP expects to raise nearly €1.5 billion selling shares in its top companies in the next few years. It plans to sell shares of energy groups Petrom, Transgaz and Transelectrica later this year in a secondary market

Konieczny said Petrom was likely to raise 400-500 million euros, while Transgaz
and Transelectrica would each raise around 50 million euros. Romgaz and power companies Hidroelectrica and Nuclearelectrica could come to the stock market via IPOs in 2012.

All succulent prospects for the shareholders, not least those long-suffering Romanians who got their stock because their property was seized under Communism 50 and more years ago. Capitalism is bringing them their long-awaited compensation, but how much remains to be seen.

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