Clare Nuttall in Bucharest -
Romania’s property restitution fund Fondul Proprietatea is pressing the government to accelerate the country’s sluggish privatisation process by moving forward with several initial public offerings (IPOs) and strategic sales of state-owned enterprises.
Fondul Proprietatea (FP) is a closed-end fund set up to reimburse Romanians whose property was confiscated in the Communist era. Managed by US-based Franklin Templeton, it currently has €3bn under management. FP is listed on the Bucharest Stock Exchange and in April 2015 carried out a successful secondary listing in London. This resulted in a broadening of the fund’s investor base, with a number of new international investors - both large and small - becoming shareholders.
The size of FP’s portfolio has fallen sharply from almost 90 companies to 49, following a series of sales and IPOs. These included several high-profile IPOs of major energy companies in 2013 and 2014, with both electricity distribution company Electrica and gas company Romgaz holding dual IPOs in Bucharest and London.
Privatisation by IPO has proved popular in Romania, primarily because it is a relatively transparent process. “A lot of questions have been asked about past transactions, and in the current political climate it’s very challenging to get the government to make decisions to sell stakes to investors,” the fund’s manager Greg Konieczny said in an interview with bne IntelliNews. “So we encourage the government first to list part of its holding, and then take a decision on whether to further reduce it’s holding.”
Two more companies, Hidroelectrica and CE Oltenia, have already been approved for IPO by the government, but there have been lengthy delays and the timing of the IPOs is still unclear. The experience of the two energy companies illustrates the challenges with privatisation in Romania, which has lagged behind its CEE peers.
The IPO of Romania’s largest electricity producer Hidroelectrica has been delayed because of the insolvency procedures at the company, but there are hopes these will be wrapped up by the first quarter of 2016. The best case scenario would be an IPO before the summer or failing that in the second half of the year, according to Konieczny. Morgan Stanley has already been selected as investment banker for the process and preparatory work is proceeding, but a lot depends on when the insolvency ends.
Hidroelectrica posted record profits in the first quarter of 2015, after carrying out a far-reaching restructuring programme. The most important step was cancelling contracts signed under previous managers, under which it sold electricity at a loss to private traders, dubbed “smart guys” by the company. Progress was finally made in early 2015, when Hidroelectrica won several court cases against the traders.
Meanwhile, the IPO of CE Oltenia, the operator of several coal-fired power plants, has been postponed indefinitely, although Romanian Energy Minister Andrei Gerea indicated on September 25 that a listing might be considered in spring 2016.
Unfortunately former CE Oltenia managers were at the centre of a corruption case also involving Prime Minister Victor Ponta. Ponta is accused of forging documents to cover payments made to him in 2007 and 2008 when he was working as a lawyer, Romania’s anti-corruption prosecutors said on September 17.
More IPOs could be in the pipeline. The listing of salt monopoly Salrom could be approved soon despite a comment from Minister of Economy Mihai Tudose on September 10 that the IPO was “not an option” given the company’s strategic importance.
Konieczny told bne IntelliNews that Tudose’s comment had been “unwise”. It also contradicts an earlier government statement indicating that Bucharest is willing for the IPO to go ahead. Having shared more information on the IPO process and costs with the minister, FP expects a shareholder meeting to take place within the next 30 days, at which the IPO could be approved. This would pave the way for an IPO before summer 2016, subject to market conditions.
A Romanian government committee is now drawing up a list of the next companies due for listing, which is likely to include Bucharest Airports, Constanta Port and Posta Romana, after the attempted sale of the company to Belgium’s bpost fell through in September.
FP is keen to push ahead despite the uncertain investment climate. “To prepare a company for IPO takes between six and 18 months. It’s very difficult to know what the market will look like in a year’s time,” says Konieczny.
Nor does he expect Romania’s upcoming elections - the country will hold both parliamentary and local elections in 2016 - to affect plans to sell stakes in state-owned or partially state-owned companies, or to affect the appetite for investment into Romania.
“Of course locally there will be a lot of noise around the election campaign. However, most investors realise that for all the main parties the goal is to further integrate with Europe. There are no strong political voices against the EU as in Greece or Hungary. We don’t expect any major shift in policy,” he says.
As FP exits some of its portfolio companies, the fund has the ability to make new investments. However, Konieczny says that under current market conditions, buying new companies would not benefit the fund.
“We would consider buying new companies if the return from them is greater than the returns we can generate for shareholders from buying back our own shares,” he explains. As of end-August, FP was trading at a discount to net asset value (NAV) of around 30%. “If we buy back our own shares we get a return of close to 50%. It would be very hard to beat that by investing into new companies.”
FP is expected to continue to get smaller, as the current €3bn is far too large for the local market. However, there are no plans to wind up the fund, which does not have a fixed expiry date.
In addition to supporting the privatisation process, FP has also helped to make the Romania more accessible to investors by offering exposure to the Romanian market. As Konieczny points out, “One of the reasons Fondul is attractive for investors - both local and international - is that it’s a proxy for Romania.”
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