Robert Dean in Budapest -

It's over two years since a group of Austrian banks and Vienna's stock exchange acquired a majority of the Budapest Stock Exchange (BÉT), but despite optimism a plethora of companies would list, a steady flow of companies leaving is the sad reality as it degenerates into a regional backwater. Unfortunately for the Austrians, their options to improve the exchange's fortunes appear limited.

On Wednesday, Canadian car and truck parts maker Linamar Corp. said it would delist its Hungarian unit from the Budapest bourse once its public tender for shares reaches 75% of the total.

Other firms expected to delist soon include architectural software-cum-Hungarian technology flag bearer Graphisoft, MOL's petrochemical subsidiary TVK, and online book trader Bookline.hu, which only joined last year.

Yet so far this year, only one small-cap firm has joined the BÉT, in the form of an investment fund from real estate firm Biggeorge.

It was the same story last year as the BÉT lost more listings than it gained. Six companies left the exchange last year, while just three joined.

"The sad story is that there is no new story; the money is here but there are no new big companies listing," says Attila Gyurcsik, an analyst at Concorde Securities. "Several big and mid-cap companies have left or will leave with just small ones listing."

He revealed that three new companies could join this year, but only real estate company Orco would provide a reasonable boost to turnover.

"Volumes have declined quite substantially and a weakness of the BÉT is that it's always been a four-stock market," says Zsolt Papp, head of CEMA Local Markets Research at ABN Amro, referring to OTP Bank, Magyar Telekom, MOL and drug maker Richter Gedeon. "All other stocks are too small in terms of liquidity to seriously interest institutional investors and it's now becoming more difficult for specialist investors."

The big danger, therefore, would be if one of these firms chose to leave. "OTP is clearly expanding but the BÉT could become too small if it needs further equity and it might have to consider listing somewhere else," Papp says.

However, the BÉT has not always been so unappealing. Thanks to large-scale privatization in the late 1990s, it was probably the leading Central and Eastern European (CEE) bourse, with companies from all the important sectors represented, recalls Papp.

That was presumably what tempted a consortium of Austrian companies, including the Wiener Börse, to buy a 68.8% stake in the exchange in 2004 as part of plans to expand across the region and create a pan-regional exchange. However, the most important contributor to that alliance would have been the Warsaw Stock Exchange (WSE), but as one of the most dynamic stock exchanges in the region, it is becoming a rival, rather than an ally, for the Wiener Börse.

Polish snub

The Wiener Börse would not comment on its future plans in the region, though its head, Michael Buhl, recently admitted in an interview with the Wprost weekly that he sees the WSE as the Vienna stock exchange's main competitor, though the two could avoid a head-on clash if the WSE focuses on Eastern markets, while the Wiener Börse concentrates on Western European corporations operating in Central Europe.

That may be wishful thinking. The WSE is now by far the largest of the exchanges established in CEE after the collapse of communism in 1989 and backed by the current nationalistic government appears more than ready to encroach on the traditional territory of such exchanges as the Wiener Börse and the Scandinavian-Baltic OMX. In 2006, 28 companies listed on the WSE, while only nine enterprises debuted on the Wiener Börse.

"While [Budapest] is just a smaller bourse with even fewer and fewer kinds of stocks being traded on it, Warsaw is expanding rapidly. It seems now that Warsaw doesn't wish to join in a Central European cooperation," says Bálint Török, an analyst with brokerage Buda-Cash.

So at least for the time being, the idea of a Central European alliance seems to have disappeared in the form that the Austrian shareholders of the Budapest exchange envisaged in May 2004. "We’ve not heard much about new ideas in recent months," says Török.

Indeed, Attila Szalay-Berzeviczy, chairman of the BÉT, was quoted in the press as saying that Budapest might opt to stand alone and a full takeover by the Wiener Börse would be resisted. He made these comments last autumn in reaction to speculation that Vienna was preparing to gain a majority share by itself.

Thus, for the time being BÉT will operate as a relatively independent exchange. Yet the exchange's remaining option of encouraging smaller companies to list also looks a stretch.

The Hungarian central bank predicts a 20-25% decline in stock trading this year as a result of government measures designed to reduce the budget deficit. Prime Minister Ferenc Gyurcsany is raising taxes and cutting subsidies, which is reducing the amount of money flowing into the stock market.

Current economic conditions are hardly encouraging firms to join the BÉT in their droves, either. "It's hard to plan for the long term and to make strategic plans as the environment is unstable and the forint volatile. Inflation is higher than regional peers, and the cost of capital higher," says Concorde Securities' Gyrucsik.

ABN Amro's Papp says the Hungarian government needs to look at how these companies fund themselves, because it doesn't seem that the exchange is fulfilling that role.

"Companies seem to find it easier to fund expansion with loans rather than equity, which is strange as interest rates in Hungary are quite high and borrowing is expensive," says Papp. "What would be helpful is if the government could make it more attractive for companies to list."

One of key problems identified as holding companies back from joining the bourse is that it is simply not worth their while to be listed and have their innermost secrets revealed to competitors, many of whom are not listed.

"Hungarian companies usually don't want to list as it's not worth the effort to be transparent," sighs Gyurcsik.

Send comments to The Editor