Baltic bonanza in the making

By bne IntelliNews February 20, 2014

Ben Seeder in Riga -

After half a decade of abandoned privatization plans and scaled-back financing, governments and state enterprises across the Baltics have recovered from financial woes and now look ready to provide investors with billions of euros of opportunities over the next five years.

These opportunities range from big government privatization deals in Latvia, to ambitious development plans by state energy companies in Lithuania and Estonia that need financing. Based on rough calculations by bne, total financing and privatization values in the region could exceed €2bn by 2020.

Most of the activity is taking place in Latvia, where the previous government's privatization schedule was thrown into chaos with the advent of the global crisis in 2008. Now, after years of stringent cost cutting and its recent entry into the Eurozone, Latvia's new government is looking to continue where it left off. In Estonia, the country's state-owned power company is likely to seek additional financing in future if it wants to realize its ambitious shale oil developments. And in Lithuania, scandals over the high price of winter heating prompted Prime Minister Algirdas Butkevicius in February to propose nationalizing the heating industry in Vilnius and Kaunas.

Ironically, this measure could present opportunities for portfolio and strategic investors, says Darius Kasauskas, a board member at Lietuvos Energija, Lithuania's state-owned power producer, and the company slated to control the "nationalized" heating assets.

Kasauskas says this government proposal is still being formulated, but the heating assets that could come under Lietuvos Energija's control might be placed in a special purpose vehicle (SPV) within its corporate structure. "We are discussing different alternatives. It is possible scenarios that existing stations, sites and infrastructure could be transferred to the special purpose vehicle," he says. "But also, cooperation with existing heating companies not owned by the state is under consideration."

He says if the plan is realized, then Lietuvos Energija would maintain only 51% control of the SPV. The power company would then seek to raise up to LTL1.5bn (€434m) by selling off the remaining 49% stake, he says. "This would be to finance the developments in the heating sector. So we will be seeking to get investors for this vehicle... through a range of means," he says.

The price of heating became a top political issue in Lithuania during the last election, when the present government came to power with the promise of making heating more affordable. Average monthly bills during the winter of 2012-2013 exceeded the level of the monthly minimum wage for the first time, making it difficult for the country's poorest to keep warm, according to Ignas Zokas, general manager of Spinter Research in Vilnius. "Many in winter have to choose between paying their rent or paying for their heating," he says.

Lietuvos Energija's proposed heating subsidiary isn't the only investment opportunity the company is putting forward. Kasauskas confirmed that the company could seek to raise an additional LTL3bn by 2020 via bond issues and bank loans, to finance its development plans in traditional and renewable power generation, as well as in new areas, such as gas. "We favour listings [of bonds] in Lithuania to aid in the development of the local capital markets," Kasauskas says.

You can be sure of shale

Meanwhile, rival Estonian state-owned power producer, Eesti Energia, says it will continue with its own plans to develop oil shale mining operations in Jordan and the US, as well as constructing a number of additional oil plants in its home territory to turn shale into lucrative synthetic crude oil.

Company spokeswoman Eliis Vennik says Eesti Energia has sufficient financing options for the moment. The company took bank loans and sold €300m worth of bonds on the London Stock Exchange in 2012, and issued another €100m late January. These were to finance the power company's new shale-based generating station at Auvere.

But further investments into oil plants and its mining operation in Utah could require hundreds of millions of euros in additional financing. And the company's cost of money could be higher in future, after ratings agency Moody's Investors Service in January downgraded Eesti Energia's credit rating to 'Baa2'. Moody's cited concerns over the company's shale oil expansion, and the vulnerability of its power generating business to volatile carbon prices and competition from Scandinavian producers exporting via new cable connections to Estonia.

In Latvia, the opportunities for investors in coming years are bigger, and more focused on the country's privatization programme that was stalled by the global crisis. Combined, the estimated value of the Latvian companies up for sale ranges from €400m to over €1bn.

After signing its $7.5bn International Monetary Fund-led bailout in 2009, Latvia's government abandoned many of its plans to sell off state enterprises, including national phone company Lattelecom and its partly owned mobile division, LMT. And as the economic crisis in the Baltic country deepened, the state came to take on new assets - including the good parts of failed Parex Bank, later renamed Citadele, and the nationalized airBaltic, which had been caught up in the collapse of local bank Krajbanka.

But three years on, with Latvia the Eurozone's latest member and the economy now experiencing solid growth after years of belt-tightening, the new government in Riga believes conditions are right to resume privatization.

Gunters Karklins, spokesman for the Latvian Privatization Agency, confirmed the government had appointed French Bank Societe Generale as lead advisor for the sale this year of the state's 75% stake in Citadele, while the decision over Lattelecom would likely come after elections, scheduled for October.

He also confirmed local press reports that Russian group Sistema has expressed interest in buying Lattelecom and LMT. The Latvian state owns 51% of Lattelecom, while the remainder is controlled by Scandinavian firm Teliasonera.

Karklins said that in the case of Citadele, neither a share market IPO or a sale to a strategic buyer have been ruled out. The European Bank for Reconstruction and Development controls the remaining 25% share in Citadele.

Latvia is also keen to sell airBaltic, the airline nationalized in 2011, after the collapse of local bank Krajbanka, which was linked to the owners of the airline at that time. State secretary at Latvia's Ministry of Transport, Kaspars Ozolins, is upbeat over the long-delayed plan to sell the government's 99% stake in the airline. He confirmed the government had discussed its sale with several potential strategic buyers - none of which were European carriers.

The Latvian government had intended to sell the then loss-making airline in 2012, but was unable to find buyers. "In terms of profits, [airBaltic] has now come back into the black... making it more attractive to buyers," he says. The company reported net profit of €700,000 in the first nine months of 2013.

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