Dominance of state monopolies challenged
Central and eastern Europe is forcing its way into the western consciousness. Poland, Hungary, Estonia and Slovenia are all expected to enter the EU by 2005, while the Czech Republic, Latvia, Lithuania and Slovakia look set to follow two years later. A boom in the currency and equity markets pending entry to the EU is widely predicted. Michael Hoare reports.
Although there were only 10 equity issues from central and eastern Europe in 1999, each one provides a valuable foothold in an accelerating market. Banks are desperate to win mandates, particularly for the big privatisations that have been sweeping the region since the end of the Communist era.
With increasing competition, however, comes shrinking profit margins. "Fees are falling for privatisations in central Europe," says Duncan Beattie, associate director on the equity syndicate at Nomura in London. "This is because of the prestige that comes from doing them and the competition to win them." But if the equity markets fulfil their potential the long-term rewards could be substantial.
Large formerly state-owned institutions dominate the region's stock markets. In the Czech Republic, five companies make up about 95% of daily turnover on the Prague Stock Exchange. In Hungary, six companies combine to make up 80% of the exchange's market capitalisation. The gap between these institutions and the small high-growth companies, according to Eva Kormendi at Concorde Securities in Budapest, is a problem the Hungarian equity market must overcome. "The middle layer of the corporate world is missing," she says. The resulting low pricing means that many Hungarian companies find it cheaper to finance from debt.
But the tide may be turning as more and more small and mid-cap companies look to the equity markets. "The salient feature of the central and eastern European markets is a transition from large state sell-offs to smaller private offerings," explains Nick Kaufmann, head of the emerging markets (equity capital markets) desk at Schroder Salomon Smith Barney in London. "As the last remaining privatisations are completed, the private issues are expected to grow in both size and number."
But Michael Fortier, managing director and head of investment banking for central and eastern Europe at JP Morgan in London, believes that although this gap can be bridged, it will never totally disappear. "Some institutions are now beginning to be overtaken by some of the media and alternative telecoms stocks," he says, "and some of the small cap companies of today will be the large cap companies of tomorrow." However, the region's equity markets will always remain two-tiered, he maintains.
Of the large formerly state-owned institutions, telecoms companies are the dominant players in the market. The banking and oil and gas sectors also remain prominent, but there is little room for other companies unless they boast cutting-edge technology. As one banker says: "The days of raising money for a tyre manufacturerare gone."
One analyst estimates that, by volume of shares traded, telecoms companies make up over 50% of the market in the Czech Republic and 40% of the Polish exchange. Of the shares traded on the Budapest Stock Exchange in April, some 36% were in telecoms companies. Matav, the main incumbent in the Hungarian telecoms sector, makes up 47% of the market capitalisation of the entire exchange.
It is no surprise then that the most eagerly awaited equity issues of 2000 include several telecoms companies. Privatisations of incumbent operators in Hungary, Lithuania, Estonia, Latvia, Croatia and Poland are all expected to come to market this year. And, despite accusations that the Czech government has lagged behind on privatisation and failed to restructure the stock market, national operator Cesky Telecom may well issue the biggest equity offering of the year.
The government will sell its 50.1% stake in the London-listed company. And it seems likely that a large proportion of this will go to a strategic investor, such as the consortium Telsource, which includes KPN and Swisscom. Including some stock purchased in the public market, KPN already owns 35% of Cesky. If it were to increase its stake to a controlling 50% then about 34% would be left for a public offering. At the present valuation of $6.3bn, this could raise $2bn for Cesky Telecom. The timing of the issue remains unclear. Launch is expected either this year or next. JP Morgan is advising the Czech government on the sale. The sale of the government's 51% stake in Cesky Radiokomunicace is being handled by ABN Amro. But this is not expected until next year, as it is unlikely that the government would want the two issues to compete.
In Hungary, the sale of some of the government's 86% stake in Antenna Hungaria is eagerly awaited.
The government is expected to reduce its holdings in the transmission company to 50% through a domestic tender in September and an IPO later in the year. It may reduce its stake further to 25% through a strategic sale in 2001.
The company has a market capitalisation of $380m, but is expecting a capital injection of some $60m from the state. This would mean the 36% that could potentially be offered would be worth about $160m. But interest in the company's 20% stake in Hungary's third GSM mobile operator, which is run by the Vodafone group, means that the issue may raise more than that. "Antenna Hungaria's original business is not high growth," says one banker, "but it has quite an attractive range of new business operations." However, he warns that the shares are very illiquid, so they might already be priced over their real value.
Polish telecoms operator TPSA is scheduled for a secondary public offering this year. Some of the government stake will be sold to a strategic investor, and the remaining 30%-50% will be offered on the equity markets. This is one of several second stage privatisations in Poland due for 2000. The biggest is likely to come from Polski Koncern Naftowy (PKN). The oil and gas company raised $570m in the largest IPO in the region last year, and is expected to return to the market in June with the largest ever secondary issue in the country.
Anything up to 30% of the company may be offered. At PKN's current market valuation of $2.4bn, this could raise up to $700m.
With a strong economy in Poland and a government in urgent need of finance, analysts assume this will come to market this year. But one analyst warns that it might be difficult to raise enthusiasm for the secondary issue because allocation for the initial offering was very concentrated in a small number of funds.
Regional cross-border consolidation is also likely to mean that the value of the stake could rise sharply. As a result, the government is unlikely to push the sale through in a hurry.
The Polish government has announced it will sell up to 10% of its 13.9% stake in former foreign savings bank Pekao. This is slated to raise about $250m. Other second stage privatisations include the sale of 10% of copper mining conglomerate KGHM, which is billed to raise $150m.
Two major privatisations in Poland have yet to be launched. The government's stake in PKO BP, the biggest bank in the country in terms of retail customers, will not come to market in 2000, but insurance company PZU is likely to turn to the equity markets this year.
A strategic investor bought 30% of PZU in 1999, and it is expected that another 25% will be sold this year, with a further 25% to go next year. At present valuation, each sale would raise about $500m.
As well as these issues on behalf of the government, however, Poland is beginning to see smaller high growth companies turn to the equity markets to raise capital. Alternative telecoms company Netia, which has been listed in the US for a year, should raise about $120m with a placing on the Warsaw Stock Exchange this year.
Telecoms operator Szeptel should also raise about $100m with an issue later this month.
In addition, the three leading internet portals in Poland may also issue shares this year. Onet, Wirtualna Polska and Interia are looking to benefit from the low but fast growing internet penetration in the country.
Onet is the largest, with 430,000 registered users and 62m unique page views per month.
But an analyst specialising in Polish technology stocks warns that with the volatility of technology, media and telecoms stocks globally, these issues are the most likely of those in the pipeline to be pulled.