Privatization in CEE
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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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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
1. The Rothschild Group
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1.3 Integrated corporate finance advice across:
1. The Rothschild Group
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
1. The Rothschild Group
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$bn): 10.7
South America
No.of countries: 7
No. of transactions: 47
Amount raised (US$bn): 28.3
Europe
No.of countries: 27
No. of transactions: 186
Amount raised (US$bn):464.1
Middle East and Africa
No.of countries:14
No. of transactions: 32
Amount raised (US$bn): 4.8
Asia
No.of countries: 9
No. of transactions: 40
Amount raised (US$bn): 190.9
Australia & NZ
No.of countries: 2
No. of transactions: 29
Amount raised (US$bn): 39.3
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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
4. Privatization in CEE
< USD 5 bn
> USD 5 bn
> USD 10 bn
> USD 20 bn
Russia
Hungary
Slovenia
Czech Republic
Poland
Ukraine
Moldova
Slovakia
Bosnia andHerzegovina
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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4. Privatization in CEE
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
4. Privatization in CEE
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)
4. Privatization in CEE
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
4. Privatization in CEE
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)
4. Privatization in CEE
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
5. Privatization in Belarus
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
5. Privatization in Belarus
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
5. Privatization in Belarus
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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5. Privatization in Belarus
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
Bosnia andHerzegovina
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)
6. Focus on the financial sector
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
6. Focus on the financial sector
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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