Tuesday, March 15, 2011

IFR-Romania -- a mini Poland in the making?

by Abhinav Ramnarayan

NEW YORK, March 14 (IFR) - The Romanian government, under pressure from the International Monetary Fund to cut its deficit significantly in the next two years, is counting on privatisations to meet that goal and make needed investments in infrastructure.

Earlier this month, the government sent out a 97-page request-for-pitches for a sell-down in oil and gas utility OMV Petrom, with requirements that bankers claimed were as onerous as the public procurement process required to build a road in one of Bucharest's more crowded neighbourhoods.

At least two top-tier banks ruled themselves out straight away. Romanian privatisations have been a start-stop affair for years; this particular RFP had a nominal fee attached to it; and there was a hint within the bulky document that fees would be quite low. Those factors were enough for the two banks to stand on the sidelines.

Yet the number of banks that have taken the 600 million euros transaction seriously -- the Romanian bourse has never seen an equity deal in excess of 100 million euros -- is more significant. CEE teams from US heavyweights JP Morgan (JPM.N), Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Citigroup C.N, as well as UBS 9716.T), are working day and night to complete pitches within an already extended deadline.

While the deal is substantial enough to attract bids in itself, there is also the promise of a larger privatisation programme, and the chance to have an early lead as the former Communist nation matures into a capitalist economy.

The Ministry of the Economy wants to sell a 9.8 percent stake in the oil and gas utility, worth about about 600 million euros, based on the utility's current market capitalisation. The ministry owns a 20.6 percent stake, and is seeking to reduce this to the minimum allowed by law.

Larger institutions are pairing up with local banks (or banks with local expertise) for their pitches -- Goldman Sachs is believed to be teaming up with UniCredit, Morgan Stanley with Raiffeisen Capital, and Citigroup with Societe Generale. In addition, local reports said JP Morgan would work with Banca Comerciala Romana, part of Austria's Erste Bank, and UBS would partner ING.

It seems likely that the Ministry of the Economy may emulate its Polish counterpart and keep bank fees low. But as in Poland, there is also the promise of future mandates. The government hopes to complete two further secondary public offerings this year - a 16 percent stake sale in Transelectrica, potentially worth $83 million based on current market capitalisation, and a 15 percent stake in natural gas unity Transgaz, worth about $156m.

FIRST OF MANY

Those deals may not be particularly alluring, but there is the potential for large IPOs going forward. Ministers want to float another energy utility, Romgaz, in the first quarter of 2012, that has an estimated equity value of 2 billion euros, according to research by BCR. The government is also under pressure to float NuclearElectrica and Hidroelectrica, which jointly account for more than 60 percent of Romania's power generation.

The chief lobbyist here is Franklin Templeton, which manages the government-owned fund Fondul Proprietatea. Fondul, which listed in Bucharest earlier this year, has a large stake in both these firms and would benefit if a market value and an easy way of selling out could be devised for them both.

Pessimists will point out that there have been only two significant IPOs since the Bucharest Stock Exchange was reopened in Communist Romania in 1995 - Transgaz, a 75 million euros flotation completed in 2008, and Transelectrica, which operates the national electricity grid. The government has made ambitious privatisation plans in the past, but they have faded to nothing.

However, some are convinced that things are different this time. The floating of Fondul was a statement of intent, analysts say, with one going so far as to call it a "seminal moment". Fondul also gives the government a backdoor privatisation option.

THE REQUIRED MOTIVATION

According to Mihai Iulian Caruntu, a research analyst with BCR, the government's need is also more desperate now. An IMF directive means that Romania must reduce its deficit to 4.4 percent of GDP this year from 6.5 percent last year, and cut it further to 3 percent for 2012. At the same time, it must also find money to upgrade its energy infrastructure if it is to get up to speed with the European Union's environment targets, Caruntu added. Petrom is the starting point.

The status of the deal is complicated by a planned capital increase by OMV, which owns just over half of OMV Petrom. The Romanian government owns a stake in OMV as well, but wants to sell that holding in advance of the capital increase.

Some believe that the Petrom deal will not come until after the government's OMV stake is sold, and there is little pressure to complete that deal, as the OMV capital increase has already been delayed since summer 2010.

But if this hurdle is crossed, the Petrom sale will boost the company's free-float - currently around 6 percent - and will also have a significant effect on the Bucharest bourse. If all goes according to plan, volumes could double to 20 million euros per trading session by 2013, Caruntu says, taking the country one step closer to its transition to a competitive economy.

(Abhinav Ramnarayan is a reporter for IFR in London)

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