Download - Privatization in CEE

Privatization in CEE

22 October 2009

Giovanni Salvetti, Managing Director, CEE Coordinator

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Contents

Introduction to Rothschild

Privatization in CEE

The Belorussian case

Focus on the financial sector

Conclusions

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4

5

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1. The Rothschild Group

1.1 A distinguished history – few key dates

220p 240p 260p 280p 300p 320p 340p 360p 380p

The Rothschilds supply gold to Wellington. The Napoleonic War brought opportunities for the Rothschilds to engage with governments across Europe

Mayer Amschel Rothschild becomes Court Agent. His five sons later establish offices across Europe

De Rothschild Frères finances the Nord Line, the first railway in the Habsburg Empire connecting Vienna with Brno

Lionel de Rothschild elected member of the English Parliament

Rothschild becomes involved in oil exploration in Russian Empire

Banque Rothschild establishes Imétal, leading mining and industrial materials distributor companies

1769 1815 1845 1847 1883 1962

Currently, Rothschild has become a leading sovereign advisor globally and especially in the Central and Eastern Europe

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Offices

950 corporate finance bankers worldwide

– 640 in Europe including CEE and Russia

– 125 in US and Canada

– 95 in Asia

– 30 in Australia

– 25 in Latin America

– 35 in Africa and ME

Corporate finance bankers

48 Rothschild’s offices in 34 countriesOver 3,000 employees of which c. 950 bankers

1.2 Strong international network with major European presence and strong local footprint


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1.3 Integrated corporate finance advice across:


Advisers of choice to corporates individuals & governments, often on a repeat basis. Applying

knowledge & insight to M&A and

strategic advice

Europe’s leading practice, advising on objectives, strategy, providers, products

& terms

Experienced teams close to the markets,

advising on valuation, tactics,

execution, implementation

Equity

Market leading adviser

to all Participants in restructuring

situations, drawing on M&A and Debt

Advisory expertise

Restructuring

Debt

M&A, Privatizations

Completed deals by number (1 Jan to 31 Dec 2008)Source Thomson Reuters 2 Jan 2009

Completed deals by number (1 Jan 2000 to 31 Dec 2008)Source Thomson Reuters 5 Jan 2009

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1.4 Awards as strong testimony of Rothschild excellence


Deals of the Year 2008:UK: Tata / Corus

M&A Bank of the Year

Debt Advisory House of the YearGerman M&A Adviser of the YearHealth & Pharma Adviser of the YearRestructuring Deal of the Year: EurotunnelDefence of the Year: Altadis

2008 & 2007 UK Financial Adviser 2008 Italy Financial Adviser 2008 Visegrad Financial Adviser 2008 & 2007 Mid-market Adviser

Debt Advisory House of the YearRestructuring Adviser of the yearCross-border Deal of the Year: Scottish & Newcastle

2009 Best LBO Advisory Bank of the Year2009 Restructuring House of the Year

2009 Best InternationalInvestment Bank in Italy

Euromoney Awards for Excellence2009 Best Global Sovereign Advisory

Private Equity.fr 2009 & 2007 M&A Adviser of the Year

France and Latin AmericaInvestment Bank of the Year 2009

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2.1 Leading privatization adviser

2. Rothschild’s government advise

Countries in which Rothschild has advised on privatisations (incl. M&A transactions)

North America

No.of countries: 6

No. of transactions: 29

Amount raised (US$bn): 10.7

South America

No.of countries: 7



Europe

No.of countries: 27


Amount raised (US$bn):464.1

Middle East and Africa

No.of countries:14



Asia

No.of countries: 9



Australia & NZ

No.of countries: 2



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3. Rothschild CEE expertise

3.1 Rothschild’s activity in CEE region

2006: €52m disposal of Skarbiec asset

mgmt holding

2007: €64m disposal of 60% stake in Agros

Nova

2007: Disposal of Dominet Bank by

Cacek Family and Merrill Lynch

2007: €122m disposal of PTE Skarbiec

Emerytura to Aegon

2006: €82.6m fairness opinion on public tender offer for 13.01% of Netia

2006: €123m offer for Broker Fm

Poland

Government of Serbia2006: €1.51bn disposal

of Mobi 63

SerbiaAlbaniaSlovenia

Bulgaria

Hungary

2007: $5.4 bn combination with Gedeon

Richter

2008: acquisition of 75% stake in CTL

Logistics S.A.

2006: US$44.6m opinion on disposal of asset mgmt operations

2007: Sale of 60% of Expander by GE Money to Innova

Capital

2005: €172m merger with Provimi Polska

Croatia

2007: Acquisition of 91% of Dukat (EV of

€345m)

Government of Serbia2003: Advisory on the

restructuring of NIS - oil company

Czech Rep.

Ukraine

2006: US$1.2bn acquisition of a majority

stake in Ukrsotsbank

2005: Acquisition of Ukrainian P&C

insurer Skide West

2008: US$750m disposal of Pravex Bank to Intesa Sanpaolo SpA

2007: Acquisition of Funni Corporation, the

4th largest Ukrainian dairy company

2006: £1.3bn acquisition of a 75% stake in Budapest Airport

2006: €157.7m acquisition of a 74.3%

stake in DZI Bank

2004: Acquisition of Queens Juices

2005: Advisory to Banca Intesa on Delta Banka

acquisition

Romania

2007: Acquisition of a 93.32% stake in Kandia-Excelent

2006: € 3.75bn acquisition of 62% stake

in Banca Comerciala Romana

2005: €430m merger with HVB Bank

Romania

2005: US$47.3m disposal of 78.5% of stake in Romportmet

2008: Advisory on disposal of Romanian second largest insurer

Lithuania

2004: Acquisition of Nord / LB insurance operations

2008: Acquisition of DISA from Procuritas

Capital Investors

2006: US$40.8m disposal of a 80%

stake in Banca Italo Albanese

Current: €2.3bn recommended cash offer

for Zentiva NV by Sanofi-Aventis S.A.

2006: €120m disposal of a 50% stake in Modra

Pyramida Stavebni Sporitelna

2004: Acquisition of food brands Sunar, Sunarek & Sunarka from Heinz

Czech Republic

2006: Acquisition of Transcentrum Bus s.r.o.

Government of Slovenia2002: €435m privatisation of 34% in Nova Banka to

KBC

Russia

RomaniaHungary

Bulgaria

CroatiaSlovenia

Albania

Serbia

Czech Republic

Poland

Ukraine

MoldovaSlovakia

Bosnia andHerzegovina

Latvia

Estonia

Macedonia

Belarus

Lithuania

2009:Restructuring

of Nadra bank debt with Export Credit Agencies

2009: combining

Telenor’s and Altimo’s holdings in OJSC

VimpelCom and Kyivstar

2004: Acquisition of juice producer Olympus Top

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4.1 Key phases

4. Privatization in CEE

Privatization is a key pillar of the economic transformation programmes launched by CEE governments in early 1990s

All CEE privatization programs started almost simultaneously during 1989-1992

In general, almost all CEE governments applied a very similar mix of methods to privatize their economies with slight but in some cases sensible differences in their implementation

Early and mid 90s were marked by:

– Mass voucher privatizations across the region (with some rare exceptions), mainly driven by social and economic transformation needs

– The first CEE pilot privatizations (5-10 companies) using controlled method (trade sales and IPOs)

– Active management and employees buyouts (the most fast and simple way to privatize the companies which were risking to go into bankruptcy)

– Establishment of stock exchange and capital market infrastructure

In late 90s and until 2007 CEE privatizations were dominated by controlled methods, aiming to maximise proceeds and develop local stock market through "national champions" listings

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4.2 Disclosed privatization proceeds in CEE: landscape


< USD 5 bn

> USD 5 bn

> USD 10 bn

> USD 20 bn

Russia

Hungary

Slovenia

Czech Republic

Poland

Ukraine

Moldova

Slovakia


Latvia

Estonia

Lithuania

Bulgaria

Albania

Serbia

Macedonia

Belarus

Croatia

Source World Bank

Romania

Total proceeds 1989-2007

USD bn Key sectors% of

proceeds USD bn Key sectors

% of proceeds

Bulgaria 1.4 Manufacturing 44% 4.9 Financial 24% Infrastructure 56%

Croatia 0.5 Manufacturing 100% 4.1 Infrastructure 56% Energy 25%

Czech 4.5 Infrastructure 39% 13.7 Financial 21%Republic Manufacturing 41% Infrastructure 61%Hungary 13.1 Infrastructure 40% 8.6 Infrastructure 59%

Manufacturing 28% Energy 17% Financial 16%

Romania 1.8 Infrastructure 38% 10.7 Infrastructure 35% Manufacturing 35% Financial 47%

Russia 7.5 Energy 57% 45.7 Infrastructure 63% Financial 19%

Slovakia 2 Manufacturing 39% 7 Infrastructure 75% Financial 15%

Ukraine 0.03 Manufacturing 100% 5.9 Manufacturing 94%Poland 8.3 Manufacturing 45% 19 Infrastructure 43%

Financial 26%Total 39.1 119.8 Total peers 158.9 Total CEE 173.4

Country

1989 - 1998 1999 - 2007

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80%

30%

65%

65%

70%

70%

70%

75%

80%

80%

0% 25% 50% 75% 100%

Belarus

Russia

Ukraine

CEE average

Croatia

Romania

Poland

Czech Rep

Hungary

Slovakia

Source EBRDSource EBRD

4.3 Current landscape: private sector development

Private share in GDP (%) 2008 private share in GDP (%)

'90 '98 '03 '08

Czech Rep 10% 75% 80% 80%Hungary 25% 80% 80% 80%Slovakia 10% 75% 80% 80%Poland 30% 65% 75% 75%Croatia 15% 55% 65% 70%Romania 15% 60% 65% 70%Russia 5% 70% 70% 65%Ukraine 10% 55% 65% 65%Belarus 5% 20% 25% 30%

CEE Average 12% 61% 67% 70%

CEE governments economic transformation efforts resulted in a robust private sector development which 2008 accounted for average 70% of GDP

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4.4 Privatization methods: voucher/coupon


This method was widely spread at the first stage of CEE privatizations in early 1990s

Main goal:

– Quick and socially fair transfer of state controlled companies to private ownership

– Establishment of economically independent and competitive businesses, capable to mobilize / manage effectively the available resources

– Fast establishment of a local capital market and stock exchange

Applied widely in CEE and Russia but to a lesser extend in Poland and Hungary

Managing entity: various but generally Ministry of Finance, Economy and Treasure, Privatization Agency (PA)

State companies were transformed into joint stock companies

Employees and all citizens were offered vouchers (freely transferrable), convertible through auctions into shares of selected state-owned companies

Two options for voucher holders:

– To put vouchers into specially created mutual funds (i.e. Poland) to which the companies’ stakes are assigned

– To sell them to other individuals (i.e. Russia), to private funds, and brokers (i.e. Russia, Czech Republic)

Voucher method Implementation

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4.4 Privatization methods: voucher/coupon (cont’d)


Push for local capital market development (i.e. Poland)

Quick transformation into private ownership

Encouraging the ownership of shares among the broad layers of the population

Low proceeds and high management costs

Weak legal framework of vouchers trading (i.e. in Ukraine vouchers were personally assigned to every citizen and could be sold only through a complicated auction system)

No guarantee of management efficiency improvement

No large scale restructuring

No guarantee for further investment plans / recapitalizations

Investment funds were often favoured comparing to citizens (i.e. Czech Republic)

Excessive fragmentation of the ownership

In certain cases resulted in unfair redistribution of wealth

Pros of voucher/coupon method Cons of voucher/coupon method

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4.5 Privatization methods: controlled method


Consisted in selling selected state-owned companies to strategic investors (mainly Western) through:

– Trade sale (tenders, auctions) prevailing method

– IPO (mainly in Poland)

Main goal:

– To maximize proceeds for the budget (i.e. Hungary was avoiding default in the 90s)

– To improve management and overall operating efficiency

– To support capital market development and set up standards

Applied in all of CEE countries and mainly in parallel with mass voucher privatization and in particular in Poland

Managing entity: various but generally Ministry of Finance, Economy and Treasure, Privatization Agency (PA)

Financial advisers involvement

The sale was carried out through transparent auctions

Mainly controlling stakes were sold

The process was often sector driven

Driven by foreign investors

Process organized and financed by:

– Governments

– International funds (i.e. $50m Margaret Thatcher fund for Poland; USAID, ECPHARE in Hungary and Bulgaria)

Controlled method Implementation

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4.5 Privatization methods: controlled method (cont’d)


Higher proceeds for the state budget

Management and efficiency improvement

Access to investors capital

Establishment of a stock market in the case of IPOs

Higher dependence on foreign multinationals in case of trade sale of controlling stakes

Required more time to be implemented

Pros of controlled method Cons of controlled method

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5.1 Importance of pilot privatization projects

5. Privatization in Belarus

A pilot privatization project ("Pilot") is a very important step and one of the first elements in the "to do’s" list for achieving general privatization programme success

The main idea is to start a broad privatization programme by first running an exemplary, well managed and successful privatization process (or a number of processes) that will result in a positive chain effect for similar processes in future and for national investment climate in general

Key objectives of a "Pilot":

– To demonstrate the feasibility and benefits of privatisation and to create a successful precedent for future privatization processes

– To raise the country’s profile among investors

– To test various techniques of reaching different investors

– To be a catalyst for establishment / improvement of investment and institutional infrastructure

– To achieve an important learning effect and to train personnel to continue the process in future

A successful pilot privatization project in Belarus will create a precedent for future privatization processes and raise the profile of the country among investors

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5.2 Pilot privatization project: general process


PA

Government

Advisers

Companies selection

Pre-privatization work

Process management

Political level

Operational management

Process Post-privatization

Small number of companies

Criteria of quality of management, financial soundness, ability to export, etc

Privatization method selection (trade sale, IPO, stake, etc)

Support and strong commitment

Establishment of institutional infrastructure for the process (PA) and legal framework

Due diligence

Restructuring

Valuation

Communication to the market ,etc

Presence of experienced and dedicated team

Realistic timetable

Efficient coordination and communication

Effectively adressing post-privatization issues

Regular monitoring of the situation

Assets

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5.3 Pilot privatization project in Poland: snapshot


Was launched in early 1990s on the back of successful Parliament voting for a Privatization law

The project lasted 1 year and consisted in running parallel privatizations of 10 companies:

– 5 IPO’s

– 5 trade sales

Were selected national companies meeting certain criteria of quality of management, financial soundness, ability to export, etc

A list of advisers were assigned to consult the Ministry of Privatization

Result:

– Selected companies were successfully privatized

– Demonstration of different privatization methods and know-how transfer

– Contribution to development of an investment culture and infrastructure in the Polish economy

– Creation of some of the capital market institutions

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5.4 Importance of creation of local stock exchange


Stock markets have played an important role in the development of the CEE and CIS regional economies

– Providers of capital to listed companies

– Encourages local stock ownership and capital accumulation

– Supports the development of domestic pension fund system

– Listing imposes greater financial discipline on companies

– Creation of a sector (brokers, funds, investment banks etc.)

Traditionally, privatizations through IPOs were chosen by CEE governments with a goal to boost the development of the domestic stock market. Successful listings of "local champions" were expected to give an important momentum to the market : PKN, MOL, CEZ, Gedeon Richter, Krka and of course regional banks such as PKO, OTP, Sberbank, VTB, and others

Well run and high profile IPOs of large and mid cap companies would enable the creation of a Belorussian stock market

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3 5 29 39

247

32 33

761

106

Bulgaria Slovakia Romania Ukraine Hungary Croatia CzechRepublic

Poland Russia

5.5 CEE stock markets landscape

Total peers stock market values as of 20.10.2009, USD bn

In Russia, Poland, Czech Republic, Croatia and Hungary stock markets were established in early stage of privatization and gained important momentum due to "national champions" listings

Total TOP 5: 95% of peers stock market value

Source Stock Exchanges, Bloomberg

CountryMarket value,

USD bnUnited Kingdom 2 910France 1 945Germany 1 401Total CEE peers 1 255

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6.1 Waves of privatization in financial sector

6. Focus on the financial sector

CEE takeover privatization “waves” CEE landscapeFirst wave Second wave Third wave Fourth wave

Country 98 - 99 00 - 01 02 - 04 05 - 07

Poland 10 7 4 3Czech Republic 3 2 3 2Croatia 4 2 3 3Macedonia 2 2 0 0Romania 4 9 2 6Slovak Republic 0 6 2 0Slovenia 0 2 2 0Hungary 2 2 5 3Bulgaria 3 3 3 6Albania 0 1 2 2Turkey 0 3 2 10Serbia & Mont. 0 0 1 12Unkraine 0 3 5 13

Four acquisition “waves” over the last 10 years in which the vast majority of players were (partly) acquired by Western banking groups

Russia

RomaniaHungary

Slovenia

Czech Republic

Poland

Ukraine

Moldova

Slovakia


Latvia

Estonia

Lithuania

Bulgaria

Albania

Serbia

Macedonia

Belarus

Croatia

TurkeyNotes1 Table depicts acquisitions of significant (>10%) initial stakes in local

banks by non-local financial institutionsSource Thompson Research, Rothschild

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6.1 Waves of privatization in financial sector (cont’d)


The privatization of banking assets represents a delicate phase of any privatization programme

Banks are infrastructure assets in any economy. They need to be well and carefully managed

Necessity of existence of a solid and reliable regulator (central bank)

Anyway the privatization of the financial sector is a natural step that makes sense to implement

Global business with regional synergies

Easier access to foreign funding? Yes, but not always

Demand

Value

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6.2 Potential scenario for Belarus banking sector - short and medium term timeline


Bank Rank

Q2 2009

Total assets

(USD m)

Q2 2009

BV (USD m)

Trade sale

IPO Comments

Belarusbank

1 10,523 1,183 Preprivatization (minority stake to financial or multilateral investors) followed by trade sale or IPO

Belagroprombank

2 6,196 1,569 Preprivatization (minority stake to financial or multilateral investors) followed by trade sale or IPO

Belinvest

5 1,612 225 Controlling stake

Paritet Bank

14 122 40 Controlling stake

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7. Conclusions

If the Government decides to take the privatization way it has the possibility of looking at several examples and previous experiences in the region and avoid the mistakes done elsewhere

A controlled privatization program starting with some pilot projects (5-10 cases) is probably the best way forward

The establishment of an effective local stock market is a great opportunity to develop a national capital market culture and attract liquidity going forward

The financial sector is probably one of the first sectors that can be subject of a wide and coordinated privatization program

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