Nicholas Watson in Prague -

After several years of rip-roaring performances that have rewarded their owners handsomely, stock exchanges across Central and Eastern Europe are putting themselves up for sale ahead of what's almost certain to be leaner times. The latest is the Prague Stock Exchange (PSE), which is seeing interest not only from the region's two heavyweights, Vienna and Warsaw, but also from Nasdaq OMX.

In August, the owners of the PSE - a collection of 26 banks and brokerages - announced they are looking to sell a controlling stake in the exchange to a strategic partner as a fresh wave of consolidation sweeps through the region and offers coming in look increasingly attractive against a backdrop of falling stock markets across the world.

At the top of the list of potential acquirers are Austria's Wiener Borse, which in June won a tender for an 81% share in Slovenia's stock exchange, and the Warsaw Stock Exchange (WSE), which is now the biggest CEE stock market by capitalisation though has yet to stamp its footprint outside its home soil. The Wiener Borse and a handful of Viennese banks already own a 68.8% stake in the Budapest Stock Exchange, which they bought in 2004; in June, the Wiener Borse said it is acquiring an additional 25.2% stake in the Budapest exchange from UniCredit Bank Hungary, taking its overall share up to 37.7%.

One hopes that if the Wiener Borse is successful, it will do a better job of elevating the Prague exchange from its current small-fry situation than it did with the Hungarian exchange, which appears to be going through a kind of reverse process of what is happening with other exchanges in the region, whereby it's losing companies (now just 48 listed) and its volume is dropping - total turnover was down almost 40% in April from the year before. While the acquisition of that extra stake clears the way for a more open integration or merger with the Vienna exchange, the benefits of Vienna's ownership have never been demonstrated. "The risks are clearly there that the Budapest capital market community may lose a substantial amount of business" as it has done since the Austrian consortium came on board in 2004, says Gyorgy Jaksity, managing director of ConCorde Securities in Budapest, who also served as chairman of the Budapest Stock Exchange from 2002-2004

Michael Buhl, head of the Wiener Borse, insists that his exchange understands its role as that of a long-term investor, and not to just maximize short-term gains, and it will focus on growing its many indices, of which 23 have a clear focus on a country, region or sector in CEE. These indices have served as a central pillar of Vienna's strategy to strike up partnerships with other exchanges, which may eventually lead to some kind of tie-up. Buhl claims that over 80% of all trading in structured products worldwide relating to CEE is based on his bourse's indices. Much of the investment into Slovenian stocks, for example, is made via the structured products and exchange-traded funds that have been issued by banks on the nine CEE indices of the VSE that contain Slovenian stocks.

"The focus of our work is clearly in working together in the area of products. Second, the Vienna Stock Exchange has long years of experience in working together with CEE exchanges. And third, the Prague Stock Exchange would join an already existing CEE network - the VSE is a shareholder of the Budapest and Ljubljana exchanges," Buhl tells bne.

Such talk gets short shrift from the head of the exchange that has overtaken the Wiener Borse. Ludwik Sobolewski of the Warsaw exchange has confirmed his interest in acquiring a stake in the PSE and told Reuters in an interview that he is "convinced" the Vienna bourse doesn't have a "business plan" to expand into the Czech market. "We intensively act to present Prague with a vision of a joint expansion for us and the Czech market," Sobolewski said.

Perhaps the most interesting bid could come from Nasdaq OMX, which is widely reported to be interested in acquiring the stake. Experts say that Nasdaq OMX could use the PSE as a beachhead into the CEE region, whose small stock markets would welcome the chance to become associated with the global brand that is Nasdaq.

Darker times

Becoming a cog in a bigger wheel is looking more and more attractive for small exchanges like the PSE as tougher times loom. "New possibilities are coming up as volumes at the exchanges have been falling over the last couple of months - already we're seeing signs that exchange owners want to take advantage of the last few years as a good basis to start talks, as 2008 looks less nice for business," says Buhl.

The PSE last year posted its best-ever results, with net profits rising by a third to €8m. As a result, the exchange paid out a record-high gross dividend worth more than €6.7m to its shareholders. Patria Finance, which holds more than a quarter of the bourse's shares, received more than €1.6m worth of dividends.

However, what had been hoped was a watershed for the PSE as it finally managed to host two IPOs over the past year (by contrast, the WSE had a record number of 81 listings in 2007) proved not to be so propitious. These long-awaited IPOs have since seen their share prices collapse in a swirl of recrimination and accusations.

AAA Auto, the region's largest used-car dealership, has seen its shares fall as much as 75% since it sold a 28% stake back in September 2007. The main problem was that what was heralded as a reason to buy the shares, the company's headlong expansion abroad, was actually its Achilles heel, leading some to question the company's level of disclosure to the investment community. "Our initial recommendation on the company was a 'Sell'. The international expansion was very risky - it's very easy to encounter management problems when expanding abroad in this region," notes Peter Vidlicka, an analyst at local investment bank Wood & Company. "Essentially, the company was squeezed from both sides: at the same time as its sales were falling, putting pressure on earnings, the bottom line was hit by the ballooning costs from an expansion that was very fast."

The collapse in the share price of the other IPO, that of Czech coalminer New World Resources, has been much more profile as its share are also listed in London and Warsaw. After pricing at CZK425.83 in May, the shares soared as high as CZK620 before falling back to earth as oil and commodity prices fell. By mid-September the shares had been beaten down by about 30%.

NWR probably has a sounder fundamental business than AAA Auto - it has coal reserves of about 419m tonnes, which is enough for 30 years of production - and will more likely benefit once sentiment in the markets turns. But while strong commodity prices initially tempted foreign investors, once those were stripped away they began to recognise exactly what they don't like about many companies in the region. The biggest investor in NWR is the colourful dealmaker Zdenek Bakala, who is widely regarded as having pulled off one of the deals of the decade by doing a leveraged buyout of the coal miner for a reputed €400m in November of 2004, then set about restructuring the company through selling off assets worth around €2bn, and then flogging off the remains to an eager market that valued the firm at €4.5bn. When the company announced its second-quarter results at the end of August, it revealed net profits that were some 40% below the consensus as employee bonuses and IPO-related costs soared. Analysts expect a similar dynamic in the second half, which could translate into a 37% increase in personnel costs for the whole year. At a time when the global investment community is tightening its collective belt, such extravagance makes investors think twice about ponying up their hard-earned cash to be used in this way.

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